Skip to main content

Full text of "Oversight of Civil Aeronautics Board practices and procedures : hearings before the Subcommittee on Administrative Practice and Procedure of the Committee on the Judiciary, United States Senate, Ninety-fourth Congress, first session .."

See other formats


OVERSIGHT  OF  CIVIL  AERONAUTICS  BOARD 
PRACTICES  AND  PROCEDURES 


HEARINGS 

BEFORE   THE 

SUBCOMMITTEE  ON 
ADMINISTRATIVE  PRACTICE  AND  PROCEDURE 

OF  THE 

COMMITTEE  ON  THE  JUDICIARY 
UNITED  STATES  SENATE 

NINETY-FOURTH  CONGRESS 

FIRST  SESSION 

ON 

OVERSIGHT  OF  CIVIL  AERONAUTICS  BOARD 

PRACTICES  AND  PROCEDURES 


VOLUME  1 


FEBRUARY  6,  14,  18,  19,  25,  AND  26, 
MARCH  4  AND  21,  1975 


Printed  for  the  use  of  the  Committee  on  the  Judiciary 


U.S.  GOVERNMENT  PRINTING  OFFICE 
WASHINGTON   :   1975 


WORTHEASTERN  UNIVERSITY  SCHOOL  of  LAW  LIBRARY 


COMMITTEE  ON  THE  JUDICIARY 

JAMES   O.   EASTLAND,   Mississippi,    Chairman 
JOHN  L.  McCLELLAN,  Arkansas  RO>L4N  L.  HRUSKA,  Nebrasl^a 

PHILIP   A.   HART,   Michigan  HIRAM  L.  FONG,  Hawaii 

EDWARD  M.   KENNEDY,   Massachusetts        HUGH    SCOTT,   Pennsylvania 
BIRCH   BAYH,    Indiana  STROM  THURMOND,  South  Carolina 

QUENTIN  N.  BURDICK,  North  DalvOta  CHARLES  McC.  MATHIAS,  Jr.,  Maryland 

ROBERT  C.   BYRD,  West  Virginia  WILLIAM  L.   SCOTT,  Virginia 

JOHN  V.  TUNNEY,  California 
JAMES  ABOUREZK,   South  Dakota 

Petee    M.  Stockett,  Chief  Counsel  and  Staff  Director 


Subcommittee  on  Administrative  Practice  and  Procedure 
EDWARD  M.  KENNEDY,  Massachusetts,  Chairman 

PHILIP   A.    HART,   Michigan  STROM  THURMOND,  South  Carolina 

j  BIRCH   BAYH,   Indiana  CHARLES  McC.  MATHIAS,  Jr.,  Maryland 

^  QUENTIN  N.  BURDICK,  North  Dakota  HUGH    SCOTT,   Pennsylvania 

'  JOHN  V.  TUNNEY,  California 

Stephen    G.    Breyer,   Special  Counsel 

Thomas    M.    Susman,   Chief  Counsel 

Philip    J.    Bakes,  Jr.,  Assistant  Counsel 

Janet    F.    Alberghini,   Staff  Member 

Theresa    A.    Burt,   Staff  Member 

Caroline  J.  Croft,  Research  Assistant 

James  F.  Michie,  Investigator 

James    I.     Campbell,  Jr.,   Staff  Member 

Geoffrey  White,  Staff  Consultant 

Stephen    L.  Jones,  Minority  Counsel 

(n) 


^ 

o 


CONTENTS 

(See  also  List  of  Witnesses  and  Topical  Index  at  the  end  of  volume  3) 


OVERSIGHT    OF    CIVIL    AERONAUTICS    BOARD 
PRACTICES    AND    PROCEDURES 


Days  of  Hearings 

Feb.  6,  1975  OVERVIEW  OF  FEDERAL  ECONOMIC  REGULATION  OF 
DOMESTIC  AIR  TRANSPORT 

Feb.  14,  1975  COMPARISON  OF  UNREGULATED  INTRASTATE  AIR- 
LINES   WITH    REGULATED    INTERSTATE    AIRLINES 

Feb.  18,  1975  CAB  REGULATION  OF  ENTRY  INTO  DOMESTIC  AIR 
ROUTES  AND  INTO  THE  DOMESTIC  AIR  TRANSPORT 
INDUSTRY 

Feb.  19,  1975  CAB'S  HANDLING  OF  CONSUMERS.  SMALL  GROUPS, 
AND  CHARTERS  IN  THE  REGULATION  OF  DOMES- 
TIC AIR  TRANSPORT 

Feb.  25,  1975         CAB  REGULATIONS  OF  DOMESTIC  AIR  FARES   . 

Feb.  26,   1975         GENERAL  QUESTIONING  OF  THE  CAB  OFFICERS 

Mar  4,  1975  USES  OF  CAB'S  AUTHORITY  TO  IMMUNIZE  INTER- 
CARRIER  AGREEMENTS  FROM  THE  ANTITRUST 
LAWS 

Mar  21,  1975  INQUIRY  INTO  THE  FAILURE  OF  THE  CAB  TO  INVES- 
TIGATE FULLY  CERTAIN  VIOLATIONS  OF  THE  FED- 
ERAL CAMPAIGN  LAWS 


VOLUME  1 

Thursday,  February  6,  1975 

TESTIMONY 

Page 

Barnum,  John  W.,  Acting  Secretary,  U.8.  Department  of  Transportation..  4 

Prepared  statement 1^ 

Engman,  Lewis,  Chairman,  Federal  Trade  Commission 22 

Prepared  statement ^^ 

Kauper,  Thomas  E.,  Assistant  Attorney  General,  Antitrust  Division,  U.S. 

Department  of  Justice ^'* 

Prepared  statement 45 

Miller,  James  C,  III,  senior  stafE  economist,  Council  of  Economic  Ad- 
visers   ■.-  ^" 

Prepared  statement  of  Gary  L.  Seevers,  member.  Council  of  Econom^c 

Advisers,  and  Mr.  Miller ^^ 

Panel  of  economists :  Merton  J.  Peck,  professor  of  economics,  Yale  Uni- 
versity ;  Roger  G.  Noll,  professor  of  economics,  California  Institute  of 
Technology;  and  Thomas  G.  Moore,  senior  fellow.  The  Hoover  Institu- 
tion on  War.  Revolution,  and  Peace,  Stanford  University 68 

Prepared  statement  of  Mr.  Peck "^9 

Prepared  statement  of  Mr.  Moore 82 

Prepared  statement  of  Mr.  Noll 84 

Kahn.  Alfred  E.,  Chairman,  New  York  State  Public  Service  Commission—  87 

Prepared  statement -,-  ^^ 

James,  George  W..  senior  vice  president  of  economics  and  finance.  Air 

Transport  Association  of  America 99 

Prepared  statement H^ 

(m) 


IV 

EXHIBITS 

Air  Transport  Association  prepared  exhibits  :  ^^^^ 

Example  of  connecting  and  thirougli-flight  complex,  eastbound 122 

Example  of  connecting  and  through-flight  complex,  westbound 123 

Monetary  value  of  travel  by  air  vs.  other  modes 124 

Dollar  value  of  time  savings  due  to  air  travel  rather  than  other  modes 

of  travel,  Birmingham,  Ala.,  to  Miami,  Fla.,  1970__ 124 

Average  fare  per  passenger  mile,  domestic  scheduled  services,  trunk  air- 
lines   (1938  dollars) 129 

Changes  in  air  fares  compared  with  other  U.S.  products  and  services--       130 
Average  fare  per  passenger  mile  (indexed  to  constant  1938  dollars)—      131 
Average  air  freight  rates  per  ton  mile,  domestic  operations,  U.S.  sched- 
uled airlines   (1940  constant  dollars) 132 

Distribution  of  trunk  airlines  scheduled  coach  fares,  year  ended  Sept. 

30,  1974,  48-state  data 133 

Income  characteristics  of  adults  who  have  flown  on  regular  passenger 

airline 134 

1974  load  factors,  nonstop  services — Boston-Detroit  market 135 

Distribution  of  airline  passenger  traffic  by  number  of  city-pairs  (year 

ended  June  1974) —       136 

Percent  of  transported  passengers  who  are  not  through  or  connecting, 

by  flight  distances  (for  city-pairs  with  nonstop  service) 137 

ATA  airline  cost  index,  U.S.  trunks  and  local  service  carriers,  3d  quar- 
ter, 1974 138 

Air  Transport  Association,  "The  Consequences  of  Deregulation,"  (Apr.  25, 

1974)   139 

Flight/segment  load-factor  distribution,  U.S. -certificated  airlines,  48- 
state  services,  Aug.  1973 161 

U.S.  scheduled  airline  1973  routes  (city-pairs)  risking  loss  of  service 
as   a   consequence  of  deregulation    (in   order  from   least   to   most 

unprofitable)    171 

Air  Transport  Association,  letter  from  George  James,  senior  vice  president 
of  economics  and  finance,  to  Senator  Edward  M.  Kennedy,  dated  May  8, 

1975,  replying  to  Senator  Kennedy's  letter  of  May  2,  1975 380 

Council  of  Economic  Advisers,  letter  from  Alan  Greenspan,  chairman,  to 
Senator  Edward  M.  Kennedy,  dated  May  1,  1975,  evaluating  the  ATA 

study,  "Consequence  of  Deregulation" 382 

Council  on  Wage  and  Price  Stability,  letter  from  Albert  Rees,  director,  to 
Senator  Edward  M.  Kennedy,  dated  May  1,  1975,  evaluating  the  ATA 

study.  "Consequences  of  Deregulation" 394 

Douglas,  George  W.,  professor  of  economics.  University  of  Texas,  prepared 

statement 437 

Drake,  John  W.,  professor  of  air  transportation.  School  of  Aeronautics  and 
Astronautics,  Purdue  University,  letter  to  Senator  Edward  M.  Kennedy, 
dated  May  15,  1975,  evaluating  the  ATA  study.  "Consequences  of  Deregu- 
lation"         4J0 

Kennedy,  Senator  Edward  M.,  letter  to  George  W.  James,  senior  vice  presi- 
dent of  economics  and  finance,  Air  Transport  Association,  dated  Fel).  7. 

1975,  requesting  a  study  on  the  consequences  of  deregulation 139 

Kennedy,    Senator  Edward  M.,  letter  to   George  W.   James,   senior  vice 
president  of  economics  and  finance.  Air  Transport  Associatioyi,  dated 
May  2,  1975.  commenting  on  the  ATA's  "Consequences  of  Deregulation"-       379 
Kennedy,  Senator  Edward  M.,  sample  letter  requesting  independent  eval- 
uations of  the  ATA  study,  "Consequences  of  Deregulation" 380 

Keeler,  Theodore  E.,  assistant  professor  of  economics,  Universitv  of  Cali- 
fornia at  Berkeley,  letter  to  Senator  Edward  M.  Kennedy,  dated  June  4, 

1975,  evaluating  the  ATA  study,  "Consequences  of  Deregulation" _'       421 

Peltzman.  Sam.  professor  of  business  economics,  University  of  Chicago, 
letter  to  Senator  Edward  M.  Kennedy,  dated  May  5,  1975,  evaluating  the 
ATA  study,  "Consequences  of  Deregulation" 423 


Sherman,  Roger,  professor  of  economics,  University  of  Virginia,  letter  to 

Senator  Edward  M.  Kennedy,  dated  May  12,  1975,  evaluating  the  ATA     Pa&e 
study,  "Consequences  of  Deregulation" 426 

Whinston,  Andrew,  professor  of  economics,  management  and  computer  sci- 
ence, letter  to  Senator  Edward  M.  Kennedy,  dated  May  9,  1975,  evaluat- 
ing the  ATA  study,  "Consequences  of  Deregulation" 430 


Friday,   February   14,    1975 

TESTIMONY 

Panel  of  California  intrastate  airlines :  Lawrence  A.  Guske,  assistant 
controller,  Pacific  Southtvcst  Airlines;  and  Robert  W.  Clifford,  presi- 
dent, Air  California 444 

Prepared  statement  of  Mr.  Guske 449 

Prepared  statement  of  Mr.  Clifford 450 

Panel  of  economists :  William  A.  Jordan,  professor  of  managerial  eco- 
nomics, York  University ;  and  John  R.  Suuimerfield,  president,  Summer- 
field  Associates 452 

Prepared  statement  of  Dr.  Jordan 464 

Prepared  statement  of  Dr.  Summerfield 487 

O'Melia,  Richard  J.,  Acting  Chairman,  Civil  Aeronautics  Board 494 

Prepared  statement 498 

Panel  of  interstate  airlines :  Morton  Ehrlich,  vice  president  for  planning 
and  chief  economist.  Eastern  Airlines;  Randall  Malin,  vice  president  of 
market  planning,  American  Airlines;  and  Morris  Shipley,  vice  president 

of  governmental  affairs.  Delta  Air  Lines 512 

Prepared  statement  of  Dr.  Ehrlich 519 

Prepared  statement  of  Mr.  Malin 521 

Prepared  statement  of  Mr.  Shipley 523 

Murphy,  Charles,  executive  director,  Texas  Aeronautics  Commission 525 

Prepared  statement 529 

EXHIBITS 

American  Airlines,  prepared  exhibits : 

Short-haul  operating  costs  and  earnings  of  American  Airlines,  Boston- 
Washington  and  New  York-Washington  routes 522 

Short-haul  operating  costs  and  earnings  of  American  Airlines,  Boston- 
Washington  and  New  York-Washington,  offering  PSA-type  service—       522 
Civil  Aeronautics  Board,  prepared  exhibits : 

Comparison  of  fare  rates  for  CAB-regulated  and  non-CAB-regulated 

carriers  in  selected  markets,  Jan.  1975 502 

Domestic   Passenger   Fare  Investigation — Phase   7    (excerpts),   Apr. 

1971   502 

Domestic  Passenger  Fare  Investigation — Phase  9    (excerpts),  Mar. 

1974  503 

General  Passenger  Fare  Investigation,  Nov.  1960  (excerpts) 508 

Jordan,  William  A.,  prepared  exhibits : 

PSA's  coach   fares  compared   with   CAB-authorized   1st  class  fares 

for  three  major  California  city-pairs,  1949 467 

PSA's    coach    fares    compared    with    CAB-authorized    coach    fares 

for  three  ma.1or  California  city-pairs,  1965 468 

PSA's    coach    fares    compared    with    CAB-authorized    coach    fares 

for  three  major  California  city-pairs,  Jan.  29,  1975 468 

Increases  in  coach  fares  from  late  1969  to  early  1975 ;  PSA  compared 

with  CAB-authorized  fares  for  three  major  California  city-pairs 469 

Southwest's  coach  fares  compared  with  CAB-authorized  coach  fares 

for  three  major  Texas  city-pairs,  Nov.  15,  1974 471 

Comparison  of  PSA,  CAB-authorized  and  Canadian  coach  fares,  Los 

Angeles-San  Francisco  vs.  Montreal-Toronto,  June  1965  and  Jan.  29, 

1975  473 

Comparison  of  competitive  bid  rates  with  CAB-authorized  rates,  cate- 
gory B  international  operations,  Aug.  4,  1959  vs.  Feb.  10,  1961 475 


VI 

Jordan,  William  A.,  prepared  exhibits — Continued 

Average  annual  output  per  employe  (PSA  compared  with  total  trunk     Page 

carriers  and  Western  Air  Lines),  1965 480 

One-way  coach  prices  for  Dallas-Houston  and  Dallas-San  Antonio 
service:  Southwest  Airlines,  Braniff  Airways,  and  Texas  Interna- 
tional Airlines,  June  1971-Dec.  1974 485 

Top  100  origin-destination  city-pairs  in  order  of  passenger  rank,  CAB- 
certificated    and    California/Texas    intrastate    airlines    (scheduled 

service,   1972) 486 

Summeriield,  John  R.,  prepared  exhibits  : 

Dollar  cost  saved  by  PSA  due  to  exclusively  intra-California  service—      490 
Summerfield.  John  R.,  president,  Summerheid  Associates,  letter  to  subcom- 
mittee, dated  Feb.  28, 1975  : 

Response  to  the  testimony  of  Dr.  Jordan 490 

Response  to   tentative  subcommittee  staff  memorandum   concerning 

intrastate/interstate  fare  comparison 515 

Texas  Aeronautics  Commission,  prepared  exhibits  : 

Southwest  Airline  service  awakened  sleeping  air  travel  markets  in 

Texas,   1971-1972 532 

Dallas-Houston  market:   average  daily  local  passengers  carried  in 

each  direction,  by  carrier,  1967-73 533 

Subcommittee  staff,  interstate/intrastate  fare  comparison :  tentative  staff 

conclusions    515 

Comparison  of  intrastate  and  interstate  routes  of  similar  distances, 
Feb.   1975 517 

Tuesday,   February  18,   1975 

TESTIMONY 

Panel  of  airlines :  William  A.  Hardenstine,  senior  vice  president — sales, 
World  Airways ;  Raymond  J.  Rasenberger,  counsel,  North  Central  Air- 
lines ;  Harvey  J.  Wexler,  senior  vice  president,  Continental  Airlines ; 
Edwin  I.  Colodny,  executive  vice  president,  marketing  and  legal  affairs, 
Allegheny  Airlines;  Andrew  M.  DeVoursney,  group  vice  president,  fi- 
nance and  planning.  United  Air  Lines;  and  Stuart  G.  Tipton,  senior  vice 

president.  Federal  affairs.  Pan  American  World  Airways 537 

Prepared  statement  of  Mr.  Hardenstine 565 

Prepared  statement  of  Mr.  Rasenberger 573 

Prepared  statement  of  Mr.  Wexler 580 

Prepared  statement  of  Mr.  Colodny 620 

Prepared  statement  of  Mr.  De  Voursney 629 

Prepared  statement  of  Mr.  Tipton 637 

Civil  Aeronautics  Board  :  Richard  J.  O'Melia,  Acting  Chairman  ;  G.  Joseph 

Minetti,  Member,  and  Lee  R  West,  Member 646 

Prepared  statement  of  Mr.  O'Melia 660 

Panel  of  government  officials  :  Donald  I.  Baker,  Deputy  Assistant  Attorney 
General,  Antitrust  Division,  U.S.  Department  of  Justice;  and  William 

A.  Kutzke,  Counsel,   U.S.  Department  of  Transportation 664 

Prepared  statement  of  Mr.  Baker 679 

Prepared  statement  of  John  W.  Snow,  Deputy  Assistant  Secretary  for 
Policy,  Plans,  and  International  Affairs,  U.S.  Department  of  Trans- 
portation (submitted  by  Mr.  Kutzke) 688 

Gagnon,    James,    chairman,    ad    hoc    committee   on    air   service.    Airport 

Operators  Council  International 695 

Prepared  statement 704 

EXHIBITS 

Allegheny  Airlines  prepared  exhibits  : 

50  percent  of  Allegheny's  passengers  are  generated  in  only  11  percent 

of  the  city-pairs  it  serves 626 

29  percent  of  Allegheny's  passengers  on  its  Pittsburgh-Philadelphia 
nonstop  flights  come  from  other  than  the  local  market,  July 
1974   627 

51  percent  of  Allegheny's  passengers  on  its  Chicago-Pittsburgh  non- 
stop flights  come  from  other  than  the  local  market,  July  1974 628 


VII 

Airport  Operators  Council  International,  prepared  exhibits  : 

Flowchart  of  the  CAB's  route  hearing  process  as  proposed  by  the     P^se 
CAB'S    staff 699 

Samples  of  high-load  factor  operations,  1973  and  1974 725 

Profit  leverage  created  by  increased  load  factor 726 

Pacific  Southwest  Airlines'  load  factor  history,  1967  to  fiscal  year 
1972  728 

Airport  Operators  Council  International,  letter  from  Donald  G.  Shay, 
president,  to  Senator  Kennedy,  dated  March  4,  1975,  clarifying  the  posi- 
tion of  the  Board  of  Directors  of  AOCI 720 

Civil  Aeronautics  Board,  material  inserted  in  the  record  for  clarification : 
14  C.F.R.  sec.  399.60  (1974),  standards  for  determining  priorities  of 

hearing  650 

Bureau  of  Operating  Rights,  Service  to  Small  Communities   (March 

1972),    excerpt 673 

Continental  Airlines,  prepared  exhibits  : 

Comparative  U.S.  and  foreign  coach  fares 587 

Continental  Airlines,  James  L.  Mitchell,  vice  president  for  regulatory  pro- 
ceedings, prepared  statement  (March  31,  1975),  in  response  to  the  testi- 
mony of  Dr.  Jordan  on  February  14,  1975 587 

California  intrastate  air  service,  1946-65,  by  carrier  and  by  city 593 

Pacific  Southwest  Airlines'  route  structure,  June  1965 594 

Pacific  Southwest  Airlines  and  Air  California,  route  structure,  1975- _       595 
Relationship  of  international  to  system  revenues  and  profit-selected 

trunks,  1973 600 

Continental   Airlines,    prepared   statement   in   response   to   the   prepared 

statement  of  Dr.  Jordan  of  April  21,  1975 617 

International  Air  Transport  Association.  Knut  Hammarskjold,  director 
general,  address  to  the  world  conference  on  tourism  and  air  transport 

(Feb.  10,  1975),  excerpts 754 

Jordan,  William  A.,  professor  of  managerial  economics,  York  University, 
prepared  statement  (April  21,  1975)  in  response  to  the  prepared  state- 
ment by  Mr.  Mitchell  of  Continental  Airlines  (March  31,  1975) 601 

Maryland  Department  of  Transportation,  Robert  J.  Aaronson,  State  Avia- 
tion Administrator,   prepared   statement 730 

Dulles  International  Airport's  primary  and  secondary  service  areas 

within  metropolitan  Baltimore/Washington 736 

Estimated  1975  Baltimore/Washington  passengers  using  Baltimore/ 
Washington    airport    under    adequate    nonstop    service    conditions 

(top  50  markets) 739 

Used  and  unused  nonstop  authority  in  Baltimore/Washington's  top 

50  markets 740 

Puerto  Rico,  Rafael  Hernandez-Colon,  Governor,  prepared  statement 743 

New  York-San  Juan  market,  load  factors,  1968-74 747 

Increases  in  lowest  regular  New  York-San  Juan  fares  and  proposed 

1975    fares 748 

Comparison  of  New  York-San  Juan  fares  with  other  vacation  markets, 

Feb.    1975 749 

Comparison  of  New  York-San  Juan  yields  with  other  vacation  mar- 
kets, Feb.  1975 750 

Airline  unadjusted  results,  mainland-Puerto  Rico/Virgin  Islands  mar- 
kets, year  ended  June  30.  1974 751 

Pan  American's  own  projections  indicate  that  passenger  fare  increases 
ranging  from  27  to  67  percent  would  be  required  at  Pan  American's 
high  expense  and  investment  levels  to  achieve  a  12  percent  rate  of 

return    752 

Comparative  indirect  expen.ses  levels,  fiscal  1974  vs.  calendar  1971 753 

United  Air  Lines,  letter  from  Andrew  De  Voursney,  group  president  of 
finance  and  planning,  to  Senator  Kennedy,  dated  Feb.  28,  1975,  concern- 
ing the  effect  of  deregulation  upon  small-town  service 635 

United  Air  Lines,  letter  from  William  R.  Nesbit,  corporate  economist,  to 
the  subcommittee,  dated  Apr.  29,  1975,  concerning  the  effect  of  dereg- 
ulation upon  small-town  service 636 


U.S.  Department  of  Transportation,  letter  from  John  W.  Snow,  Acting 
Assistant  Secretary  for  Congressional  and  Intergovernmental  affairs,  to 
Senator  Kennedy,  dated  Apr.  25,  1975,  responding  to  several  followup     Page 

questions  by  Senators  Kennedy  and  Thurmond 690 

Distribution  of  travelers  along  the  California  coast  and  the  Northeast 

coast,  by  mode  of  travel,  1968  and  1970 694 

Virginia  Aviation  Transportation  and  Airports  Study  Commission,  letter 
from  Paul  W.  Manns,  chairman,  to  Senator  Kennedy,  dated  Febru- 
ary 11,  1975 755 

World  Airways,  prepared  exhibits : 

CAB  filing  fees  for  12  months  ended  June  30,  1974 566 

Documents  necessary  for  a  single  travel  group  charter  flight 566 

Summary  of  World's  1967  proposal  for  a  $75  transcontinental  service—  567 

Instructions  for  travel  group  charter  application 571 

VOLUME  2 

Wednesday,   February   19,   1975 

TESTIMONY 

Panel  of  consumers'  groups:  Patricia  Kennedy,  traffic  analyst.  Aviation 
Consumer  Action  Project ;  Jens  Jurgen  Wegscheider,  Travel  Informa- 
tion Bureau;  and  Mark   Silbergeld,  attorney.   Consumers   Union 761 

Prepared  statement  of  Ms.  Kennedy 832 

Prepared  statement  of  Mr.  Wegscheider 840 

Prepared  statement  of  Mr.  Silbergeld 848 

Panel  of  travel  clubs  and  charter  carriers :  Edward  J.  McDevitt,  Air  Club 
International;  G.  F.  Steedman  Hinckley,  chaii-man  and  chief  executive 
oflScer,  Overseas  National  Airways ;  and  Robert  Beckman,  attorney.  Air 

Europe  International -- _" 866 

Prepared  statement  of  Mr.  McDevitt 949 

Prepared  statement  of  Mr.  Hinckley 951 

Prepared  statement  of  Mr.  Beckman 1052 

Yohe,  Jack,  Director,  Office  of  the  Consumer  Advocate,  Civil  Aeronautics 

Board    1053 

Prepared    statement 1119 

EXHIBITS 

Air  Club  International,  prepared  exhibits : 

Order  74-9-70  (1970) —       869 

American  Airlines,  Randall  Malin,  vice  president,  marketing  planning, 
letter  to  the  subcommittee,  dated  Apr.  4,  1975,  concerning  inter  alia  cross 

subsidy 1141 

Aviation  Consumer  Action  Project,  prepared  exhibits  : 

Consumer   information   pamphlets 764 

Passenger   rules   tariff,   No.   380,   failure   to  operate   on   schedule  or 

failure  to  carry i 772 

Examples  of  a  major  airline's  advertisement  campaign 792 

CAB  Order  72-11-106  (1972),  ACAP  vs.  Trans  World  Airlines 804 

CAB  Order  73-6-9   (1973) 811 

Letter  from  Reuben  B.  Robertson  III,  and  Martin  M.  Temkin,  at- 
torneys from  Herbert  A.  Goldberg,  to  CAB,  dated  Jan.  21,  1974, 
reouesting    final    decision    in    the    case    of   American   Airlines   vs. 

Herbert   A.    Goldberg -- 826 

"How  to  Join  Airline  Club  :   8- Year  Wait,"  Wa.shington   Star-News, 

Jan.    27,    1974 - 829 

Consumers  Union,  prepared  exhibits  : 

"How  Airlines  Overcharge  on  Connecting  Flights,"  Consumers  Re- 
ports, May  1972 — 850 

"CAB  Tallies  Complaints  Against  U.S.  Airlines,"  Consumers  Reports, 

Aug.   1972 — 855 

"  'Discount'  Air  Fares :  A  Maze  of  Overcharges,"  Consumers  Reports, 

Oct.    1972 — 856 

"CAB  Speaks  Softlv  But  Wields  No  Stick,"  Consumers  Reports,  Nov. 
1972   861 


IX 

Consumers  Union,  prepared  exhibits — Continued 

"A  Small  Step  Toward  Fairer  Air  Fares,"  Consumers  Reports,  Jan.     I'aee 
1973   861 

"Still  Searching  for  a  Correct  Air  Fare,"  Consumers  Reports,  Feb. 
1973  861 

"Meet  the  New  Elite:   Airline  Club  Members,"   Consumers  Reiwrts, 
Apr.     1973 863 

"CAB  Cites  Airlines  for  Overcharging,"  Consumers  Reports,  June  1973_      864 
"Most   Airlines   in    Same   Place  on    Scorecard   of  Complaints,"    Con- 
sumers Reports,  Oct.  1973 865 

Cathy,  Henry  D.,  Jr.,  Director  of  Transportation,  New  Castle,  Delaware, 
and  William  H.  Comer,  Sr.,  Airport  Manager,  Greater  Wilmington  Air- 
port,   prepared    statement 1129 

Civil  Aeronautics  Board,  prepared  exhibits : 

Jaclv  Yohe,  Office  of  Consumer  Affair.s,  Consumer  Complaint  Survey 

(1973)    - 1063 

Jack    Yohe,    Director,    Office   Affairs,    "A   White   Paper   on   Airlines' 

Handling  of  Baggage  Claims"   (Oct.  1973) 1073 

CAB  Order  E-24198  (1966),  Baggage  Liahility  Rules  Case 1103 

CAB,  letter  to  scheduled  U.S.  air  carriers,  Feb.  1975,  regarding  tariff 

complexity   1111 

CAB,  letter  from  Jack  Yohe,  Director,  Office  of  the  Consumer  Advo- 
cate, dated  Dec.  12,  1974,  to  consumers 1116 

Civil  Aeronautics  Board,  letter  from  Jack  Yohe,  Director,  Office  of  the 
Consumer  Advocate,   to   Senator  ICdvvard  M.  Kennedy,  dated  Apr.   14, 

1975,  listing  the  budgets  of  the  CAB  departments 1055 

Civil    Aeronautics    Board,    "Notice    of    Proiwsed    Rulemaking :    Baggage 

Delay  and  Loss  Compensation,"  Mar.  6,  1975 1124 

Civil  Aeronautics  Board,  "Notice  of  Propo.sed  Rulemaking:  Construction, 
Publication,  Filing,  and  Posting  of  Tariffs  of  Air  Carriers  and  Foreign 

Air  Carriers,"  Mar.  6,  1975 1127 

Civil  Aeronautics  Board,  James  L.  Weldon,  Jr.,  Acting  Director,  Bureau 
of  Enforcement,  to  Senator  Kennedy,  dated  Apr.  10,  1975,  in  response  to 
Senator  Kennedy's  letter  of  Mar.  25,  1975,  concerning  the  allocation  of 

BOE  effort  between  various  kinds  of  carriers 1132 

Civil  Aeronautics  Board,  reference  material  inserted  in  the  record  by 
the  subcommittee : 

Summary   of   investigative  time   of  the   Bureau   of  Enforcement   by 

category  of  investigation,  1971-74 '. 760 

Kennedy,  Senator  Edward  M..  letter  to  Richard  J.  O'Melia,  Acting  Chair- 
man, Civil  Aeronautics  Board,  dated  Mar.  25,  1975,  containing  several 

followup    questions 1131 

Kohn,   Eugene   H.,   Docktor  Pet   Centers,   prepared   statement    (Feb.   25, 

1975)    1130 

"I'm  Suzie,  Don't  Fly  Me!  Facts  About  Air  Travel  for  Pets"___ 1130 

Overseas  National  Airways,  prepared  exhibits  : 

CAB  Order  E-19492   (1963) 967 

"CAB  Knew  of  $!/>  Billion  North  Atlantic  Rebating  in  1971,"  Travel 

Trade  Gazette,  Feb.  1975 978 

"Airlines  Admit  to  Paying  Travel  Agents  Kickbacks,"  New  York  Times, 

Dec.  21,  1974 979 

"Airlines    Plan    to    Settle    Kickback    Investigation    Given   to   Justice 

Unit,"  Wall  Street  Journal,  Feb.  13,  1975 980 

Complaint  of  National  Air  Carrier  Association  Against  Airlift  Inter- 
national and  Seaboard  World  Airlines,  dated  Feb.  14,  1975 983 

Advance  booking  round  trip  charters  under  proposed  S.  421 993 

Examples  of  affirmative  NACA  proposals  to  CAB  relating  to  charter 

rules,  1969  to  1974 994 

CAB   Order  74-11-122    (1974) 995 

Comparison  of  S.  421  and  CAB's  TGC  mode 998 

"CAB  :  Can  This  Agency  Be  Saved?"  Air  Transport  World,  Jan.  1975--     1000 
The  development  of  the  intra-European  charter  market  and  its  rele- 
vance in  projecting  trends  in  other  world  markets 1003 


TtJESDAY,  February  25,  1975 

TESTIMONY 

Page 

Nader,    Ralph 1150 

Prepared  statement 1163 

Panel  of  Administration  officials :  John  W.  Snow,  Deputy  Assistant  Secre- 
tary for  Policy,  Plans,  and  International  Affairs,  L^.S'.  Department  of 
Transportation;  Donald  I.  Baker,  Deputy  Assistant  Attorney  General, 
Antitrust  Division,   U.S.  Department  of  Justice;  and  George  C.  Eads, 

Assistant  Director,  Cotmcil  of  Wage  and  Price  Stability 1179 

Prepared  statement  of  Mr.  Snow 1200 

Prepared  statement  of  Mr.  Baker 1203 

Prepared  statement  of  Mr.  Eads 1211 

Finney,  Thomas  D.,  Jr.,  counsel.  Continental  Airlines 1220 

Prepared  statement 1237 

Muse,  M.  Lamar,  president.  Southwest  Airlines 1242 

Prepared  statement 1250 

Dingivan,  Edward  A.,  vice  president.  National  Air  Carriers  Association. ^  1260 

Prepared  statement 1282 

EXHIBITS 

Civil  Aeronautics  Board,  materials  inserted  in  the  record  for  clarification : 

Estimates  of  cost  per  passenger,  charter  service,  for  .-^e'ected  markets.     1279 
Keeler,  Theodore  E.,  assistant  professor  of  economics,  Univ.  of  California 

at  Berkeley,  prepared  statement 1296 

Airline  costs  and  fares  for  30  city-pairs  (1968  prices) 1300 

Fares,  costs,  and  regulation 1304 

Keeler,  Theodore  E.,  "Airline  Regulation  and  Market  Performance'".-     1305 

Load  factors — California  intrastate  vs.  trunk,  1951  to  1970 1315 

Airline  costs  and  fares  for  30  city-pairs  (1968  prices) 1317 

Airline  costs  and  prices  with  a  50-percent  load  factor  (1968  prices )__     1318 

1972  fares  and  costs 1319 

Nader,  Ralph,  prepared  exhibits : 

Conn,  Stephen,  "Airlines  and  Alaska  :  The  Ever- Weakening  Thread"--     1168 

"Convention  of  Association  of  Village  Council  Presidents" 1171 

"Alaska  Aviation  Industry  Is  Really  Riding  High"  (Feb.  1975) 1174 

"New  Air  Cargo  Center  Opens"  (Feb.  1975) 1177 

Nader,  Ralph,  Answers  to  Questions  of  Senator  Thurmond 1177 

National  Air  Carriers  Association,  prepared  exhibits : 

CAB  Order  74-10-106  (Oct.  30,  1974)   (North  Atlantic  lATA  fares)—     1263 
Statements  of  the  Civil  Aeronautics  Board  on  passenger  fare  matters 
to  be  negotiated  at  the  lATA  North  Atlantic  Traffic  Conference  in 

Fort  Lauderdale   (June  1974) 1276 

Sample  comparison   of   scheduled   normal   fares   with   charter   rates 

(March  1975) 1285 

National  Air  Carrier  Association,  Edward  J.  Driscoll,  president,  letter 
to    the    subcommittee,    dated    May    6,    1975,    concerning   suggested 

changes  to  the  charter  restrictions 1286 

"Briefs"  regarding  U.S.  supplementals'  safety  record  over  the  last 

decade  1288 

National  Transportation  Safety  Board,  press  release,  Apr.  17,  1975 1295 

Southwest  Airlines,   prepared  exhibits : 

Passengers   in   Dallas-Houston,    Dallas-San   Antonio,    and   Houston- 
San  Antonio    (1965-72) 1252 

Southwest  Airlines,   M.   Lamar  Muse,  president,  letter  to  subcommittee, 

dated  May  7,  1975,  describing  new  service  to  Harlingen,  Tex 1253 

Southwest  Airlines.  Paul  Y.  Seligson,  attorney,  letter  to  the  subcommittee, 

dated  May  9,  1975,  describing  new  service  to  Harlingen,  Tex 1257 

U.S.  Department  of  Justice,  prepared  exhibits: 

Indictment  in  United  States  v.  Braniff  Airways,  Inc.,  crim.  No.  SA-75 

(W.D.  Tex.,  filed  Feb.  14,  1973) 1190 


XI 

Wednesday,  Febeuaby  26,  1975 

TESTIMONY 

Civil  Aeronautics  Board :  Richard  J.  O'Melia,  Acting  Chairman ;  Whitney 

Gillilland,    Vice   Chairman;    G.   Joseph   Minetti,   member;   and  Lee  R.  Page 

West,  member 1^23 

Prepared  statement  of  Mr.  O'Melia 1386 

EXHIBITS 

Browne,  Secor,  former  Chairman,  CAB,  minutes  of  a  telephone  interview 
with  the  subcommittee  staff  on  February  28,  1J)75  (original  staff  notes 
and  the  version  corrected  by  Mr.  Browne) 1361 

Civil  Aeronautics  Board,  Richard  J.  O'Melia,  Acting  Chairman,  letter  to 
Senator  Edward  M.  Kennedy,  dated  Apr.  11,  1975,  concerning  the  develop- 
ment of  efficiency  standards  for  airlines 1350 

Additional    comments    of   members    G.    Joseph    Minetti    and    Lee   R. 


West 


1351 


CAB,    Bureau    of    Economics,    submission    in    the    mainland    United 

States-Puerto  Rico  Case  (1975) 1593 

Civil  Aeronautics  Board,  William  B.  Caldwell,  Jr.,  Director,  Bureau  of 
Operating  Rights,  letter  to  Senator  Edward  M.  Kennedy,  dated  Apr.  3, 
1975,  responding  to  Senator  Kennedy's  letter  of  March  25,  1975,  request- 
ing an  explanation  of  BOR  practice  of  highlighting  of  "effect  on  indus- 

trv's  rate  of  return"  in  memos  to  the  Board 1374 

Civii  Aeronautics  Board,  John  E.  Robson,  Chairman,  letter  to  Senator 
Edward  M.  Kennedy,  dated  May  30,  1975,  concerning  disclosure  of  CAB 

officials  prior  business  relations  and  contacts  with  outsiders 1385 

Civil  Aeronautics  Board,  Richard  J.  O'Melia,  Acting  Chairman,  letter  to 
Senator  Edward  M.  Kennedy,  dated  April  11, 1975,  in  response  to  Senator 
Kennedy's  letter  of  Mar.  17,  1975  concerning  inaugural  flights,  gratuities, 

and  travel  vouchers  of  CAB  officials 1392 

CAB,  Phyllis  T.  Taylor,  Acting  Chief,  Minutes  Section,  memorandum 
to  the  General  Counsel,  CAB,  dated  Dec.  6,  1966,  on  the  subject  of 
the   rules   applicable   to  the   participation   by   Board   personnel  in 

inaugural  ceremonial  flights  (notation  8932) 1398 

CAB,  John  H.  Warner,  General  Counsel,  memorandum  to  the  Executive 
Director,  dated  Jan.  9,  1964.  on  the  subject  of  the  rules  applicable 
to  the  participation  by  Board  personnel  in  inaugural  or  ceremonial 

flights    I'lO'^ 

Comptroller  General  of  the  U.S.,  letter  opinion  to  the  Chairman  of 
the  CAB,  dated  May  20,  1958  (37  Comp.  Gen.  776)  concerning  cere- 
monial  flights 1409 

CAB,  memorandum  from  the  Board's  minutes  files  entitled  "Inaugural- 
Ceremonial  Flights"  (undated) 1414 

CAB,  Regulation  Policy  Statement  No.  19,  to  Part  399  of  the  Regu- 
lations  (14  CFR  399  et  seq)    (1963) 1419 

CAB,  Regulation  Policy  Statement  No.  6,  to  Part  223  of  the  Regu- 
lations   (14  CFR  223  et  seq)    (1958) 1426 

CAB,  Regulation  Policv  Statement  No.  21.  to  Part  399  of  the  Regu- 
lations (14  CFR  399  et  seq)    (1964)    (excerpt) 1431 

CAB,  Andrew  J.  Anessi.  Chief,  Tariffs  Section,  Bureau  of  Economics, 
letter  to  Marion  F.  Curran.  Director — Special  Transportation  and 
Sales  Agreements.  Pan  American  World  Airways,  dated  April  24, 

1973,   approving  an   inaugural  flight  to  Caracas.   Venezuela 1436 

CAB,    news    release   of   May    7,    1973,    describing   the   dedication    of 

certain  aviation  facilities  in  Oakland 1441 

CAB,  sections  360  to  367A  of  the  Regulations,  relating  to  reimburse- 
ment of  CAB  employees  for  travel  expenses  (1973) 1444 

CAB,  Brief  for  Timm  in  the  case  of  Aviation  Consumer  Action  Project 

V.  Timm,  No.  74-1945   (D.C.  Cir.  1975) 1553 

CAB,  Bureau  of  Enforcement,  complaints  alleging  the  illegality  of 
"VIP"  treatment  by  20  airlines  in  favor  of  certain  persons  and 
I)etitions  for  enforcement  (1974) 1582 


XII 

Civil  Aeronautics  Board,  materials  inserted  in  the  record  by  the  subcom- 
mittee for  clarification : 

Tables  showing  the  return  on  investment  of  the  airlines  as  a  group     Pa&e 

(1947-74)    and  by  carrier    (1962-71) 1332 

CAB,  Ralph  L.  Wisner,  Chief  Administrative  Law  Judge,  memorandum 
to  Robert  Timm,  Chairman,  CAB,  dated  April  2,  1973,  listing  route 
cases  unheard  "pursuant  to  informal  instructions  of  the  Chairman's 
office    in    connection    with    the    unofficial    moratorium    on    route 

eases"    ^^^^ 

Example  of  a  CAB  staff  memo  highlighting  the  topic  "Effect  on  Indus- 
try's Rate  of  Return" 1368 

Lazarus,  Monte,  former  assistant  to  Secor  Browne,  former  Chairman,  CAB, 
minutes  of  a  telephone  interview  with  the  subcommittee  staff  on  Feb- 
ruary  27,    1975    (original    staff   notes    and    the    version    corrected    by 

Mr.    Lazarus) 1363 

Lockheed-California  Co.,  Grayden  M.  Paul,  director,  airline  requirements, 
letter  to  the  subcommittee,  dated  Mar.  21,  1975,  containing  cost  estimates 
of   operating   the   L-lOll-l    for   various    distances   with   various   load 

factors    1336 

Mcintosh,  Colin,  "Airline  Profits  .  .  .  Why  Delta?  .  .  .  And  Why  Not 
Eastern?"  Air  Transport  World,  July  1974  (inserted  by  the  subcommittee 

for    clarification) 1345 

Pan  American  World  Airways,  Patrick  W.  Lee,  attorney,  letter  to  the  sub- 
committee, dated  June  19,  1975,  replying  to  the  submission  of  the  CAB's 

Bureau  of  Economics  in  the  letter  of  Apr.  11,  1975 1663 

Wisner,  Ralph  L.,  former  Chief  Administrative  Law  Judge,  CAB,  minutes 
of  a  telephone  interview  with  the  subcommittee  staff  on  February  25, 
1975  (original  staff  notes  and  the  version  corrected  by  Mr.  Wisner) 1359 

VOLUME  3 

Tuesday,  March  4,  1975 

TESTIMONY 

Panel  of  airlines :  Randall  Malin,  vice  president,  marketing  planning, 
American  Airlines;  Edward  A.  Beamish,  senior  vice  president,  corpo- 
rate planning.   United  Air  Lines;  and  Richard   S.  Mauer,  senior  vice 

president  and  general  counsel.  Delta  Air  Lines 1699 

Prepared  statement  of  Mr.  Malin 1^4 

Prepared  statement  of  Mr.  Beamish 1T27 

Prepared  statement  of  Mr.   Mauer 1732 

Baker.  Donald  I.,  Deputy  Assistant  Attorney  General,  Antitrust  Divi- 
sion,   U.S.    Department    of   Justice 1737 

Prepared  statement 1742 

Panel  of  community  representatives :  Erie  A.  Taylor,  director  of  avia- 
tion, Clark  County,  Nevada;  and  Robert  J.  Aaronson.  administrator. 
State  Aviation  Administration,  Maryland  Department  of  Transporta- 
tion          1753 

Prepared  statement  of  Mr.  Taylor 1764 

Prepared   statement  of  Mr.   Aaronson 1777 

Civil    Aeronautics    Board :    Richard    J.    O'Melia,    Acting   Chairman,    and 

Robert   Timm,    member 1781 

Prepared  statement  of  Mr.  O'Melia 1795 

Gilstrap,  Roderic  W.,  first  vice  president,  Air  Line  Pilots  Association 2150 

Prepared  statement 2151 

EXHIBITS 

Air  Line  Pilots  Association,  International,  J.  J.  O'Donnell,  president,  pre- 
pared statement 2221 

American  Airlines,  prepared  exhibits : 

CAB,  James  L.  Weldon,  Jr.,  Bureau  of  Enforcement,  letter  to  James 
W.  Callison,  Delta  Air  Lines,  dated  Dec.  17,  1974,  denying  Delta 
Air  Lines'  petition  for  an  enforcement  proceeding  against  American 

Airlines 1722 

American  Airlines,  Richard  J.  Fahy,  Jr.,  attorney,  letter  to  the  subcom- 
mittee, dated  Mar.  13,  1975,  commenting  upon  the  prepared  exhibits  of 
Clark  County,  Nevada 1776 


XIII 

Bower,  Richard  S.,  professor  of  business  economics,  Dartmouth  College, 

special  study  for  the  subcommittee  on  the  appropriate  return  on  equity     Page 

in  the  airline  industry 2284a 

Trunk  airlines,  ratio  of  market  value  of  stock  to  book  value,  and 

return  on  book  value,  by  carrier,  1964-73 2284g 

Table  showing  association  of  market  price  per  share/book  value  per 

share  with  return  on  book  equity 2284k 

Civil  Aeronautics  Board,  William  B.  Caldwell,  Jr.,  Director,  Bureau  of 
Operating  Rights,  letter  to  Senator  Edward  M.  Kennedy,  dated  Feb.  28, 
1975,  categorizing  8,057  interairline  agreements  submitted  to  the  CAB, 

1967-74  1790 

Civil  Aeronautics  Board,  materials  inserted  in  the  record  by  the  subcom- 
mittee for  clarification  and  documentation  : 

CAB  Order  70-11-35  (Nov.  6,  1970),  rejecting  the  "cluster"  agreement 

between  American,  TWA,  and  United 1800 

CAB  Order  71-8-91  (Aug.  19,  1971),  approving  the  "transcontinental 

economic  agreement"  between  American,  TWA,  and  United 1805 

CAB  Order  72-11-6  (Nov.  2,  1972),  approving  first  extension  of  the 

"transcontinental  economic  agreement" 1818 

CAB  Order  73-7-147  (July  27,  1973),  approving  the  2d  extension  of  the 

"transcontinental  economic  agreement" 1846 

CAB  Order  72-6-70  (June  16,  1971),  approving  the  N.Y.-San  Juan 
"economic"     agreement    between    American,     Eastern,     and    Pan 

American   1884 

CAB  Order  72-11-7  (Nov.  2,  1972),  approving  the  first  extension  of  the 

N.Y.-San  Juan  "economic"  agreement 1892 

CAB  Order  73-8-59  (Aug.  10,  1973),  approving  the  2d  extension  of  the 

N.Y.-San  Juan  "economic"  agreement 1902 

CAB  Order  7a-10-110  (Oct.  31,  1973),  approving  the  "20-market  fuel- 
related  agreement"  and  the  "transcontinental  fuel-related  agree- 
ment" between  American,  TWA,  and  United 1913 

CAB  Order  74-7-105  (July  24,  1974)  approving  the  2d  extension  of  the 
"20-market  fuel-related  agreement"  and  the  "transcontinental  fuel- 
related  agreement" 1927 

CAB  Order  75-1-140  (Jan.  31,  1975),  approving  the  3d  extension  of  the 
"20-market  fuel-related  agreement"  and  the  "transcontinental  fuel- 
related  agreement" 1957 

Capacity  Reduction  Agreements  Case,  initial  decision 1984 

Clark  County,  Nevada,  prepared  exhibits  : 

TraflBc  in  the  Las  Vegas-New  York  market,  the  Las  Vegas-Chicago 
market,  and  for  the  Las  Vegas  station,  before  and  after  the  capacity 

reduction  agreements   were  initiated 1769 

Actual  vs.  standard  load  factors.  Las  Vegas-Denver,  Jan.-Mar.  1974__     1770 
Las  Vegas  markets  subject  to  capacity  reduction  agreements  and  dura- 
tion of  agreements 1772 

Bar  graph  showing  deleterious  effect  of  capacity  reduction  agreements 

in  Las  Vegas-New  York  and  Las  Vegas-Chicago  markets 1773 

Load  factors  in  Las  Vegas'  agreement  markets  compared  with  other 

load   factor  standards 1773 

Bar  graph  showing  actual  vs.  standard  load  factors.  Las  Vegas-Denver 

market.  Jan.-Mar.   1974 1774 

Las  Vegas-Denver  agreement  cost  Las  Vegas  $1  million   (excluding 

gambling) 1775 

Clark  County,  Nev.,  Richard  P.  Taylor,  attorney  for  Erie  Taylor,  letter 
to  the  subcommittee,  dated  Mar.  27,  1975,  commenting  upon  American 

Airlines'  letter  of  Mar.  13,  1975 1776 

Delta  Air  Lines,  R.  S.  Maurer,  senior  vice  president  and  general  counsel, 
letter  to  Senator  Edward  M.  Kennedy,  dated  Mar.  7,  1975,  concerning 

E^st  coast-Florida  load  factors.  Mar.  1974-Feb.  1975 1710 

Delta  Air  Lines.  R.  S.  Maurer,  senior  vice  president  and  general  counsel, 
letter  to  Senator  Edward  M.  Kennedy,  dated  Mar.  21.  1975,  commenting 

generally  on  the  antitrust  immunity  for  interairline  agreements 1735 

Federal  Aviation  Act  of  1958,  sees.  412,  414.  49  U.S.C.  sees.  1382,  1384  (1970) 

(inserted  in  the  record  by  the  subcommittee  for  clarification) 1782 


XIV 

Karth,  Joseph  E.,  Congressman,  Fourth  District,  Minnesota,  prepared  state-     Page 

ment  on  the  mutual  aid  pact 2228 

Kimbriel,  Harry  A.,  Jr.,  vice  president,  Alliance  One,  prepared  statement--     2234 
Moser,  Herbert  H.,  vice  president,  Merrill  Lynch,  Pierce,  Fenner  &  Smith 

Inc.,  prepared  statement '_     2240 

Personal  outlays  on  transportation  and  recreation  services  as  percent- 
age of  disposable  personal  income,  1968  dollars,  1953-74 2242 

Personal  consumption  expenditures  on  purchased  transportation  as 

percent  of  disposable  personal  income,  1950-72 2243 

Cyclicality  of  domestic  trunk  traffic,  1953-69 2244 

Relative  weight  of  factors  contributing  to  increase  in  traffic,  1962-66__     2244 
Seasonality  of  North  Atlantic  and  Mainland-Hawaii  scheduled  air 

traffic 2246 

Distribution  of  travel  by  purpose  of  trip,  for  automobile  and  airplane, 

1972    2247 

Characteristics  of  nonbusiness  travel,  by  automobile  and  airplane,  1972     2248 
Income  distribution  of  travelers,  for  automobile  and  airplane,  1972___     2249 

Domestic  trunk  and  North  Atlantic  traffic,  1970-74  (by  month) 2250 

Distribution  of  1971  domestic  trunk  coach  traffic,  by  fare  plans 2252 

North  Atlantic  traffic,  scheduled  vs.  charter,  1967,  1970,  and  1973 2253 

New  York-London,  summer  roundtrip  fares,  1972-74 2254 

Travel  agents'  commissions  and  reservations  and  sales  expense  as  a 

percentage  of  total  passenger  revenues 2255 

Capital  and  stock  structure  comparisons,  U.S.  trunk  airlines  and  man- 
ufacturing corporations,  1961-73 2256 

Airline  increases  in  employment  costs  outpace  those  of  other  U.S.  in- 
dustries,   1965-70 2257 

Trunk  passenger  load  factors,  1963-74 2258 

Trunk  airline  stock  prices  and  earnings,  1965-74 2260 

U.S.  population  distribution,  1961-80 2261 

Projection  of  families  by  income  class  percent  distribution,  1970-80 2262 

Income  propensity  and  elasticity  of  international  travel 2262 

Peltzman,  Sam,  professor  of  economics.  University  of  Chicago,  prepared 

statement   2265 

Trans  World  Airlines,  IMelvin  A.  Brenner,  vice  president,  marketing  plan- 
ning, prepared  statement  (Mar  4,  1975) 2155 

Industry  load  factors,  New  York-Los  Angeles  market,  before  and  after 

the  capacity  reduction  agreements 2158 

Trunk  airlines'  return  on  investment,  1955-74 2159 

Trunk  airlines'  load  factors,  year  ending  Sept.  30,  1973 2160 

Trunk  airlines'  load  factors,  Nov.  1973-Jan  1974  compared  with  Nov. 

1974-Jan.    1975 2161 

Brief  of  TWA  in  the  Capacity  Reduction  Agreements  Case,  CAB  docket 

22908  (filed  Feb.  7,  1975) 2162 

Trunkline  airlines'  rate  of  return  on  investment,  domestic  operations, 

by  carrier,  1967-71 2183 

Load  factors  in  the  transcontinental  agreement  markets,  1967-71,  com- 
pared with  the  load  factors  of  the  domestic  trunkline  operations.—     2185 

Percentage  changes  in  domestic  trunkline  trafSc,  1972-74 2198 

U.S.,  Circuit  Court  of  Appeals  for  the  D.C.  Circuit,  materials,  inserted  in 
the  record  by  the  subcommittee  for  clarification   and   documentation: 

Air  Line  Pilots  Ass'n.  v.  CAB,  475  F.2d  900  (D.C.  Cir.  1973) 1976 

United  States  v.  CAB, F.2d (D.C.  Cir.  1975) 2119 

U.S.  Department  of  Transportation,  John  W.  Barnum,  Acting  Secretary, 

prepared  statement  (Mar  4,  1975) <;— V""" 

U  S  Department  of  Transportation.  John  W.  Barnum,  Deputy  Secretary, 
letter  to  Senator  Edward  M.  Kennedy,  dated  July  24.  1974  evaluating 
the  ATA  Rtudv.  "Consequences  of  Deregulation"    (p.  139.  above)  _  --»t) 

U  S     General  Accounting  Office,  partial  response  to  Senator  Edward  M_ 

Kennedy's  request  for  an  evaluation  of  the  ATA  study,  "Consequences  of     ^^^ 

■npreo-nlation"   (p.  139,  above) . 7, ;?       "" 

Subcommittee  staff,  an  insert  for  the  general  reader  -Pjf -"^ ';7^„^7£ 

reduction  agreements"  and  giving  a  chronology  of  events  relevant  to  the     ^^^ 
hearings  of  this  day 


XV 

Fetoay,  March  21,   1975 
TESTIMONY 

Alterman,  Stephen  A.,  former  Assistant  Chief,  Formal  Proceedings  Divi-     Page 

siou,  Bureau  of  Enforcement,  Civil  Aeronautics  Board 2303 

Burns,   Bernard  B.,   former  investigator,  Bureau  of  Enforcement,   Civil 

Aeronautics  Board 2323 

Rickey,  Robert  F.,  former  Assistant  Chief,  Investigation  Division,  Bureau 

of  Enforcement,  Civil  Aeronautics  Board 2326 

Weldon,  James  L.,  Jr.,  former  Chief,  Formal  Proceedings  Division,  Bureau 

of  Enforcement,  Civil  Aeronautics  Board 2329 

Hadlock,  Gerald  F.,  former  Deputy  Director,  Bureau  of  Enforcement,  Civil 

Aeronautics  Board 2336 

Knudson,  John  V.,  former  investigator,  Bureau  of  Enforcement,  Civil  Aero- 
nautics Board 2344 

Edison,  Peter  C,  former  Assistant  Chief,  Informal  Compliance  Division, 

Bureau  of  Enforcement,  Civil  Aeronautics  Board 2348 

Rodriguez,  Elias  C,  former  Chief,  Informal  Compliance  Division,  Bureau 

of  Enforcement,  Civil  Aeronautics  Board 2349 

O'Melia,  Richard  J.,  Acting  Chairman,  Civil  Aeronautics  Board ;  formerly 

Director,  Bureau  of  Enforcement,  CAB 2350 

Timm,  Robert  D.,  member.  Civil  Aeronautics  Board ;  formerly  Chairman, 

CAB   2374 

EXHIBITS 

Civil  Aeronautics  Board,  material  inserted  in  the  record  by  the  subcommit- 
tee for  clarification  or  documentation  : 
Alterman,  Stephen  A.,  memorandum  to  the  Director,  BOE,  dated  July 

12,  1973,  on  the  subject  of  "contributions :  analysis  of  Federal  Avia- 
tion Act  violations" 2304 

Alterman,  Stephen  A.,  memorandum  to  the  Director,  BOE,  dated  July 

13,  1973,  on  the  subject  of  "illegal  campaign  contributions :  methods 

of  proceeding" 2305 

Alterman,  Stephen  A.,  memorandum  to  the  Director,  BOE,  dated  July 
20,  1975.  on  the  subject  of  "investigation  of  illegal  unreported  cam- . 
paign  contributions:  proposed  action" 2307 

Alterman,  Stephen  A.,  memorandum  to  Chief,  Litigation  Division, 
CAB,  dated  July  25.  1973,  on  the  subject  of  "illegal  unreported  cam- 
paign contributions:  guide  for  questioning"  (showing  questions 
subsequently  deleted)   2312 

Alterman,  Stephen  A.,  memorandum  to  the  file  on  "Unreported  Cam- 
paign Contributions  Investigation,"  dated  July  31,  1973,  on  the  sub- 
ject of  "summary  of  action" 2317 

Memorandum  from  Assistant  Chief,  Legal  Division,  CAB.  to  Chief. 
Investigation  and  Audit  Division,  CAB,  dated  Feb.  28,  1975,  on  the 
subject  of  "special  audits/political  contribution  cases" 2336 

Memorandum,  dated  Nov.  5,  1973,  closing  one  of  the  campaign  contri- 
bution cases 2345 

O'Melia,  Richard  J..  Director,  BOE,  memorandum  to  Chairman,  CAB. 
dated  Aug.  8.  1973.  on  the  subject  of  "industrywide  survey  regarding 
political  contributions  by  air  carriers" 2355 

Timm.  Robert  D..  Chairman,  memorandum  to  Director,  BOB,  on  the 
subject  of  "industrywide  survey  regarding  political  contributions 
by  air  carriers" 2356 

Stout.  Joseph  W..  Jr..  memorandum  to  Chairman.  CAB.  dated  Mar.  7, 

1975.  on  the  subject  of  "political  contribu^^ion  investigation" 2364 

Example  of  field  report  of  the  "industrywide  survey  regarding  politi- 
cal contrihuHons  by  air  carriers"  (Julv  1973') 2367 

Stont,  Joseph  W..  Jr..  Chief.  Investisration  and  Audit  Division.  BOE.  to 
Director,  BOE,  dated  Mar.  18,  1974,  on  the  subject  of  "completed 

invpstisration  ca^es" 2368 

Gingerv.  William  M..  former  Director.  Bureau  of  Enforcement.  CAB.  letter 
to  the  .subcommittee,  dated  Februarv  15.  1975.  concerning  hi«  investiga- 
tion of  BOE^  investisrntion  of  the  failure  of  certain  airlines  to  report 
certain  campaign  contributions  in  1973 2300 


XVI 

Kennedy,  Senator  Edward  M.,  letter  to  Edward  H.  Levi,  U.S.  Attorney 
General,  dated  May  12,  1975,  requesting  an  investigation  to  determine 
w'lietlier  Federal  criminal  laws  were  violated  in  connection  with  sworn 
testimony  before  the  Subcommittee  on  Administrative  Practice  and  Pro- 
cedure of  the  Senate  Committee  on  the  Judiciary  on  Mar.  21,  1975  and  in 
connection  with  the  CAB's  investigation  of  possible  corporate  iwlitical  Page 
contributions  by  air  carriers  in  1973 2385 


DEPOSITIONS  TAKEN  BY  THE   SUBCOMMITTEE 

Heye,  Thomas,  former  Administrative  Assistant  to  Robert  D.  Timm,  Chair- 
man, Civil  Aeronautics  Board  {deposition  taken  Mar.  27,  1975) 2387 

Stout,  Joseph  W.,  Jr.,  former  Chief,  Inv&stigation  and  Audit  Division, 
Bureau  of  Enforcement,  Civil  Aeronautics  Board  (deposition  taken  Apr. 
18,  1975)   2419 


List  of  witnesses  by  name  and  organization 2471 

Persons  who  submitted  additional  material  at  the  subcommittee's  request- _     2474 
Topical  index 2475 


Volume   1 


OVERVIEW  OF  FEDERAL  ECONOMIC  REGULATION  OF 
DOMESTIC  AIR  TRANSPORT 


THURSDAY,    FEBRUARY    6,     1975 

U.S.  Senate, 
Subcommittee  on  Administrative 

Practice  and  Procedure  of  the 

Committee  on  the  Judiciary, 

Washington^  D.C. 
The  subcommittee  met,  pursuant  to  notice,  at  10:20  a.m.,  in  room 
2228,  Dirksen  Office  Building,  Senator  Edward  M.  Kennedy  (chair- 
man of  the  subcommittee)  presiding. 
Present :  Senator  Kennedy. 

Also  present :  Stephen  Breyer,  special  counsel ;  Philip  Bakes,  assist- 
ant counsel;  Thomas  M.  Susman,  chief  counsel;  and  Lewis  Beasley, 
assistant  to  Senator  Tliurmond. 

Senator  Kennedy.  The  subcommittee  will  come  to  order. 

OPENING  STATEMENT  OF  SENATOR  KENNEDY 

The  Senate  Subcommittee  on  Administrative  Practice  and  Pro- 
cedure is  today  continuing  the  examination  it  began  last  November 
of  the  procedures  and  practices  of  the  Civil  Aeronautics  Board.  The 
subcommittee  has  scheduled  7  days  of  hearings  this  winter  to  look  into 
the  CAB's  activities  relating  to  rates,  entry,  enforcement,  and 
antitrust. 

Federal  regulation  of  transportation  began  in  the  1880's  with  two 
objectives :  First,  to  protect  the  consumer  from  concentrations  of  eco- 
nomic power,  and  second,  to  guarantee  that  essential  transportation 
would  be  available  to  all  Americans.  But  regulation  has  gone  astray. 
What  may  have  been  good  for  the  last  quarter  of  the  19th  century  is  a 
disaster  for  the  last  quarter  of  the  20th  century.  Either  because  they 
have  become  captives  of  regulated  industries  or  captains  of  outmoded 
administrative  agencies,  regulators  all  too  often  encourage  or  approve 
imreasonably  high  prices,  inadequate  service,  and  anticompetitive  be- 
havior. The  cost  of  this  regulation  is  always  passed  on  to  the  consumer. 
And  that  cost  is  astronomical. 

In  the  transportation  area  alone,  studies  have  estimated  the  cost 
to  the  public  of  Federal  regulation  to  be  $8  to  $16  billion  each  year. 
That  is  an  unreasonable  price  at  any  time.  It  is  wholly  unacceptable 
under  our  present  economic  conditions. 

President  Ford  is  asking  the  American  people  to  absorb  billions 
of  dollars  in  additional  living  costs  to  alleviate  our  energy  problems. 
At  the  same  time,  he  is  asking  Congress  to  freeze  or  reduce  spending 
on  social  programs  designed  to  ease  the  financial  burden  on  those  least 
able  to  cope  with  recession  and  inflation.  The  President  is  predicting 
a  frightening  unemployment  rate  of  over  8  percent  to  continue  during 
the  next  several  years. 

(1) 

51-146   O  -  76  -  pt.  1  -  2 


Americans  are  being  asked  to  make  these  harsh  and  difficult  sacri- 
fices. Many  of  these  sacrifices  cannot  be  justified  on  their  own;  but 
they  stand  in  even  starker  contrast  with  the  continuing  drain  on  our 
economy  that  regulatory  agencies  impose. 

The  direct  effects  of  regulation  by  the  Civil  Aeronautics  Board  are 
translated  into  the  prices  the  public  pays  to  get  from  one  city  to  an- 
other— whether  for  business,  pleasure,  or  family  emergencies.  Some 
critics  have  estimated  that  as  a  direct  result  of  CAB  regulation  the 
public  pays  from  32  to  47  percent  in  excess  air  fares.  These  inflated 
costs  are  passed  on  to  the  consumer  by  the  sellers  of  goods  and  services 
who  must  utilize  the  airplane  to  transport  its  products  and  employees. 
CAB  economic  regulation  is  thus  of  vital  concern  to  every  American. 
Although  the  way  the  CAB  regulates  may  be  complex,  the  effects  of 
that  regulation  are  dramatic  and  clear. 

The  administration  has  asked  Congress  to  create  a  commission  to 
study  regulatory  reform.  While  I  support  that  proposal,  I  also  believe 
that  the  President  and  the  Congress  have  a  duty  to  propose  something 
concrete  to  bring  about  reform. 

Throughout  our  hearings  we  will  be  asking  two  questions  about 
the  CAB's  practices  and  procedures :  First,  are  they  effective  ?  Do  they 
result  in  reasonably  priced  air  transportation  for  the  consumer  and 
reasonable  incentives  for  the  airlines  to  provide  that  service?  Second, 
are  they  fair?  Do  they  give  the  public,  as  well  as  the  airlines,  an  ade- 
quate opportunity  to  present  their  points  of  view  before  important 
decisions  are  made  ? 

Last  November  the  subcommittee  began  this  process  by  examining 
the  CAB's  decision  to  set  minimum  charter  rates.  We  concluded  that 
in  this  instance  the  decisionmaking  process  operated  neither  fairly 
nor  effectively.  The  CAB's  actions  in  this  area  will  unjustifiably  add 
millions  of  dollars  to  the  public's  bill  for  air  travel.  Subsequently,  the 
Court  of  Appeals  for  the  District  of  Columbia  issued  an  indefinite 
stay  of  the  CAB's  minimum  charter  rate  policy. 

Today,  we  will  begin  with  a  broad  overview  of  CAB  policies  and 
procedures.  Next  week  we  will  examine  the  fares  and  service  provided 
by  intrastate  carriers,  and  the  performance  of  State  regulations  of 
airlines  who  are  not  regulated  by  the  CAB.  We  will  ask  why  State- 
regulated  airlines  in  California  and  Texas  provide  profitable,  unsub- 
sidized  service  at  fares  that  are  sometimes  50  percent  lower  than  those 
charged  bv  the  CAB-regulated  carriers.  We  want  to  know  the  reasons 
for  these  differences.  The  subcommittee  will  ask  whether,  as  is  so  often 
charged,  regulation  by  the  CAB  is  responsible  for  them. 

We  will  go  on  to  review  the  Board's  procedures  for  determining 
proper  rates.  In  the  past  14  months,  the  Board  has  granted  direct 
fare  increases  of  over  16  percent.  It  has  eliminated  special  fares  for 
children  and  vacationers,  producing  an  average  fare  increase  of  more 
than  20  percent.  Neither  inflation  nor  rising  fuel  costs  can  fully  ex- 
plain these  fare  increases. 

So  again  we  must  ask.  is  CAB  regulation  responsible?  Do  the 
Board's  procedures  ensure  that  low  airline  profits  lead  to  quick,  auto- 
matic, fare  increases,  while  high  airline  profits  are  neither  quicklv  nor 
automatically  translated  into  fare  cuts?  Do  its  ratemaking  procedures 
reward  the  inefficient,  unprofitable  carriers  with  industrywide  fare 


3 

increases  that  efficient  carriers  do  not  need  and  would  not  impose  in  a 
competitive  environmejit?  Do  the  Board's  procedures  work  to  produce 
rates  based  on,  in  the  words  of  tlie  P>deral  Aviation  Act  of  1958.  the 
"lowest  cost  consistent  with  the  furnishing  of  adequate  service"  ?  More 
fundamentally,  if  the  task  of  regulating  air  fares  is  so  inherently  com- 
plex that  imperfections  and  higher  costs  will  result  no  matter  what 
ratemaking  procedures  are  used,  then  we  will  ask  to  what  extent 
reform  can  be  accomplished  by  returning  the  determination  of  prices 
to  the  marketplace  and  the  laws  of  supply  and  demand. 

The  subcommittee  will  also  analyze  the  Board's  procedures  for 
awarding  routes.  It  has  been  claimed  that  a  more  flexible  entry  policy — 
a  policy  that  more  freely  awarded  routes  to  qualified  applicants — 
would  itself  help  keep  prices  low.  The  fear  of  attracting  competition 
may  also  act  as  an  additional  constraint  on  airline  pricing  policies.  Yet 
the  CAB  lias  adopted  precisely  the  opposite  appioach  in  recent  years. 
But,  it  has  never  decided  to  adopt  this  policy  formally,  as  required  by 
the  Administrative  Procedure  Act.  The  subcommittee  will  examine 
the  Board's  past  behavior,  as  well  as  its  recently  announced  proposals 
for  procedural  change,  to  detemnne  whether  both  the  public  and  the 
industry  are  being  adequately  served  by  Board  actions. 

The  subcommittee  will  also  look  at  the  CAB's  use  of  its  enforcement 
powers.  We  will  ask  whether  the  agency  has  devoted  disproportionate 
resources  to  stamping  out  low-fare  transportation  charters — air  travel 
clubs  that  put  pleasure  travel  within  the  reach  of  millions  of  average 
citizens — while  doing  little,  if  anything,  about  airline  overcharge. 

Finally,  the  subcommittee  will  look  at  the  Board's  use  of  its  power 
to  grant  antitrust  exemption  to  several  carriers  who  reached  agree- 
ments to  curtail  service  competition  in  selected  markets.  Has  the  Board 
imposed  safeguards  sufficient  to  assure  that  the  public  will  not  suffer 
unnecessary  curtailment  of  service  ?  Have  the  reduced  costs  of  the  car- 
riers who  have  curtailed  service  been  passed  on  to  those  consumers  who 
now  receive  that  reduced  service?  Does  the  CAB  too  easily  ignore  the 
policies  of  the  antitrust  laws,  allowing  the  airlines  to  engage  in  collu- 
sive action  to  divide  up  markets  and  profits  ? 

The  scope  of  these  hearings  is  broad  and  our  time  is  limited.  But 
we  have  been  substantially  aided  by  the  cooperation  of  the  airlines, 
several  executive  agencies,  and  the  CAB  itself.  Even  before  these  hear- 
ings were  announced  last  December,  the  airlines  and  the  CAB  were 
compiling  data  and  submitting  responses  to  detailed  and  extensive 
questionnaires  from  the  subcommittee.  Some  of  our  questioTis  asked 
for  data  and  analyses  that  neither  the  CAB  nor  the  airlines  had  pre- 
viously compiled. 

The  responses  have  been  immeasurably  helpful  to  the  subcommittee. 
The  Board,  executive  agencies,  and  the  airlines  have  had  an  oppor- 
tunity to  reexamine  their  own  assumptions  in  preparing  for  these 
hearings.  Just  last  week,  I  am  happy  to  report,  the  Board  itself 
announced  that  it  was  establishing  an  internal  study  group  to  re- 
examine its  functions  and  the  need  for  regulation.  T  hope  that  study 
croup  will  pay  dose  attention  to  the  evidence  we  Avill  be.  developing  in 
these  hearings.  The  subcommittee  will  certninlv  monitor  the  progress 
of  the  group's  work  and  will  closely  study  its  final  report. 

The  Department  of  Transportation,  the  Department  of  Justice,  the 
President's  Council  of  Economic  Advisers,  and  the  Council  on  Wage 


and  Price  Stability  have  lent  substantial  assistance  to  our  efforts.  They 
have  developed  concrete  proposals  for  reform  that  will  be  explained 
by  them  during  the  course  of  these  hearings. 

Today,  we  will  hear  from  several  government  agencies,  some  experts 
on  economic  regulation,  and  representatives  of  the  scheduled  airline 
industry.  These  witnesses  have  been  asked  to  tell  us  whether  there  is 
a  need  for  reform  and  to  suggest  the  direction  reform  should  take. 
Thus,  today's  hearing  will  provide  an  overview  of  the  major  problems 
involved  in  airline  regulation.  Proposals  for  reform  will  be  set  before 
the  public  by  various  witnesses,  and  these  proposals  will  provide  a 
framework  for  the  examination  that  will  continue  more  specifically 
in  the  future  hearings  this  month  and  next. 

Our  first  witness  this  morning  is  Mr.  John  Barnum,  who  came  to 
Washington  from  his  New  York  law  practice  in  1971  to  become  Gen- 
eral Counsel  of  the  Department  of  Transportation.  In  1973,  he  assumed 
the  job  of  Deputy  Secretary  of  Transportation  and  is  presently  Acting 
Secretary  of  Transportation. 

As  I  indicated  in  my  opening  statement,  the  DOT,  both  Mr.  Barnum 
and  Mr.  Binder,  have  been  extremely  helpful  to  us  in  preparing  for 
these  hearings. 

We  are  pleased  to  have  you  with  us  and  we  look  forward  to  your 
testimony  this  morning. 

STATEMENT  OF  JOHN  W.  BARNUM,  ACTING  SECRETARY  OF  TRANS- 
PORTATION, ACCOMPANIED  BY  WILLIAM  A.  KUTZKE,  OFFICE 
OF  THE  GENERAL  COUNSEL,  DEPARTMENT  OF  TRANSPORTATION 

Mr.  Barnum.  Thank  you,  Mr.  Chairman,  and  thank  you  for  the 
kind  words  concerning  Assistant  Secretary  Binder  and  Assistant 
Secretary  Snow,  who  are  not  available  at  this  time. 

I  would  like  to  introduce  William  A.  Kutzke  who  has  been  on  the 
firing  line  for  the  DOT  in  the  CAB  proceedings  in  which  the 
Department  participates. 

I  would  also  thank  you  for  your  invitation  to  present  the  views  of 
the  Administration  on  the  important  subject  of  regulation  of  air 
transportation  and  how  it  can  be  improved. 

The  Department  is  vitally  interested  in  the  issue.  Since  DOT's  in- 
ception in  1967,  we  have  participated  in  many  proceedings  before  the 
Civil  Aeronautic  Board.  In  our  Board  filings,  the  Department  has 
been  a  strong  advocate  of  improving  the  economic,  performance  of 
air  transportation  through  increased  reliance  on  competitive  market 
forces.  The  unifvinff  theme  that  runs  through  virtually  all  of  our 
filings  before  the  CAB  is  that  greater  reliance  on  competitive  market 
forces  will  improve  the  economic  performance  of  the  industry  and  re- 
sult in  lower,  more  cost  related  rates,  will  reduce  excess  capacitv,  and 
will  provide  the  air  traveling  public  with  a  wider  and  more  desirable 
range  of  service  and  price  options. 

I  believe  we  are  now  at  a  regulatory  watershed.  For  the  past  several 
months,  the  Administration  has  been  reviewing  the  transportation 
regulatory  system  with  a  view  to  improving  both  performance  and 
economic  efficiency.  The  reform  proposals  presently  being  prepared  by 
the  Administration  mark  a  major  departure  from  the  regulatory 
regime  we  have  relied  upon  in  the  past.  The  Administration  will 


submit  to  Congress  in  the  near  future  a  proposal  which  will  funda- 
mentally redirect  our  air  transportation  reoulatory  policy.  Your  hear- 
ings, therefore,  come  at  an  opportune  moment.  Today  I  will  outline 
the  Administration's  position  on  reguhation  of  air  transportation. 

The  need  for  an  air  regulatory  reform  act  is  demonstrated  both  by 
economic  research  and  by  our  experience.  At  present,  for  example,  air 
carriers,  sliippers,  and  passengers  frequently  face  a  web  of  restrictive 
government  regulations  which  stifle  competition,  discourage  innova- 
tion, and  foster  inefficiency.  In  many  respects,  tlie  present  air  regu- 
latory structure  is  outdatecl,  inequitable,  inefficient,  uneconomical,  and 
sadly  irrational.  It  often  misplaces  incentive  and  disincentive,  disorts 
competitive  advantage,  protects  inefficient  carriers  from  effective 
competition,  over-restricts  market  entiy,  artifically  inflates  rates  and 
misallocates  our  Nation's  resources.  Under  the  current  system,  many 
consumers  pay  an  artificially  inflated  price  for  air  transportation 
because  rate  setting,  unnecessary  entry  restriction,  capacity  agi:eements 
and  other  forms  of  shelter  from  competition  sanctioned  by  the  Board 
protect  the  least  efficient  carriers,  permit  rates  substantially  above  an 
efficient  cost  level  and  distort  competitive  market  forces.  The  resulting 
economic  waste  and  associated  inefficiency  is  substantial. 

The  present  air  regulatory  system  is  the  product  of  a  different  era. 
While  the  needs  and  conditions  on  which  air  regulation  was  first  pre- 
dicted some  40  years  ago  have  changed,  the  goals  and  practices  of 
government  regulation  Jiave  not.  It  is  unfortunately  a  truism  that 
regulation  begets  further  regidation  and  that  regulations  outlive  their 
rationale. 

I  fully  agree  with  the  statements  you  made  in  your  opening  remarks 
that  regulatory  practices  developed  40  years  ago  are  not  suitable  to  the 
last  quarter  of  this  century. 

In  19-38,  when  the  Civil  Aeronautics  Act  Avas  passed,  goveniment 
assistance  through  protection,  subsidy,  promotion,  and  regulation  was 
a  necessary  factor  in  the  development  of  a  new  and  strujrgling  in- 
dustry. Tliirtv-seven  years  later,  conditions  have  changed.  The  air 
tra.vei  marketis  mature.  Traffic  has  grown.  Growth  has  led  to  stability. 
The  industry  is  vigorous.  But  this  i-egulatory  system  which  protected 
it  and  made  it  that  way  has  not  kept  pace. 

The  problems  once  faced  have  bee]i  largely  solved,  ^ow  we  are  faced 
with  problems  that  are  a  by-product  of  that  success.  The  promotion 
which  once  fostered  growth  now  causes  inefficiency.  The  restrictions 
whicli  once  guaranteed  stability  now  retard  competition.  The  regu- 
latoiT  protection  which  once  insured  existance  now  prevents  sayings. 

We  need  a  better  system  which  comes  closer  to  producing  optimum 
social  and  economic  results,  one  which  maximizes  efficiency,  economies, 
and  consumer  options  and  which  produces  the  best  mix  bet^^  een  low 
cost  and  high  quality  service. 

cab's  first  major  power:  fares 

The  most  pressing  problems  in  the  airline  regulator}'  field  cluster  in 
three  broad  areas — ratemaking  and  pricing  flexibility,  market  entrv^ 
and  exit,  and  anticompetitive  agreements.  Each  area  is  in  need  of  re- 
form. Let  me  identify  what  we  see  as  the  future  direction  which  the 
Administration  suggests. 


6 

A  major  difficulty  with  CAB  policy  has  been  ratemaking  and  the 
carrier  inability  to  raise  and  lower  rates  in  response  to  the  demands 
of  the  marketplace.  This  in  turn  forces  carriers  into  costly  and  un- 
economic service  competition,  deprives  the  traveling  public  of  the 
range  of  price  and  service  options  which  would  otherwise  be  available, 
and  results  in  substantial  economic  waste  and  inefficiency. 

Section  404  of  the  Federal  Aviation  Act  requires  carriers  to  estab- 
lish just  and  reasonable  rates.  Section  1002  permits  the  Board  to 
prescribe  maximum  or  minimum  rates  if  it  is  of  the  opinion  that  the 
rates  charged  are  unjust,  unreasonable,  preferential,  or  discriminatory. 
In  deciding  whether  a  rate  is  too  high  or  low  the  Board  takes  into 
account,  among  other  factors,  whether  the  rate  is  compensatory,  pro- 
viding the  carrier  with  sufficient  revenue. 

The  result  of  the  Board  administration  of  these  sections  has  been 
the  elimination  of  price  competition,  thereby  restricting  competition 
to  service.  Passengers  find  airlines  competing  for  their  patronage 
through  elaborate  cuisines,  free  drinks,  attractive  stewardesses,  multi- 
colored planes,  and  piano  bars.  But  they  do  not  have  a  menu  where 
different  quality  service  is  related  to  different  prices.  This  is  a  serious 
loss. 

Many  passengers  would  prefer  the  opportunity  to  select  carriers 
based  on  price  in  addition  to  type  of  service.  Some  passengers  would 
prefer  high-load  factor,  low-frill,  low-fare  service.  Others  are  willing 
to  pay  for  more  comfortable  and  more  costly  service.  Present  pro- 
cedures do  not  produce  that  variety  of  price  and  service  options.  Often, 
present  regulation  causes  fares  well  above  those  which  would  occur 
in  a  more  competitive  air  transportation  market.  With  prices  fixed  at 
levels  above  market  rates,  carriers  compete  on  the  basis  of  service. 
Such  service  competition  produces  substantial  unused  capacity  and 
unnecessarily  low-load  factors,  presently  averaging  about  57  percent 
in  the  domestic  market.  In  the  transcontinental  market,  for  example, 
rates  are  set  sufficiently  high  to  permit  the  carriers  to  earn  a  reasonable 
return  with  load  factors  in  the  mid-40-percent  range.  DOT  believes 
that  many  transcontinental  passengers  would  prefer  the  minor  incon- 
veniences associated  with  higher  load  factors  in  return  for  less  expen- 
sive tickets.  In  a  more  competitive  market,  carriers  would  respond  by 
providing  such  low-cost  service. 

One  recent  study  showed  that,  at  an  average  load  factor  of  75  per- 
cent, prices  could  be  27  percent  lower  than  at  a  50-percent  load  factor. 
While  75-percent  load  factors  are  unrealistic  in  most  markets,  this 
example  illustrates  the  potential  savings  associated  with  pricing 
flexibility. 

"zone  or  reasonableness"  for  fares 

Present  Board  policies  encourage  lower  than  optimal  load  factors. 
dot's  testimony  in  the  CAB's  Domestic  Passenger  Fare  Investigation 
showed  that  when  load  factors  increase  beyond  a  break-even  level 
(defined  to  include  profits),  carriers  schedule  additional  capacity, 
thereby  lowering  load  factors  to  the  break-even  level  again. 

Because  of  this  inflexibility,  in  the  Dojriestic  Paasenger  Fare  Investi- 
gation, DOT,  among  other  things,  urged  the  Board  to  establish  a  15- 
percent  "zone  of  reasonableness"  above  and  below  the  fare  structure 
curve.  The  zone  would  not  apply  in  monopoly  markets,  as  defined  by 


the  CAB,  where  the  Board  would  continue  to  review  and  suspend 
rates.  Within  the  zone,  carriers  would  be  permitted  to  compete  on  the 
basis  of  price,  free  from  regulatory  interference.  Outside  the  zone,  the 
Board  could  continue  to  suspend  rates  it  believed  unlawful  under  its 
ratemakino;  standards. 

Senator  Kennedy.  Why  wouldn't  some  of  the  stronger  official  car- 
riers just  lower  their  rates  until  they  drive  the  competition  out? 

Mr.  Barnum.  That  might  be  the  result  if  you  didn't  simultaneously 
make  a  change  with  respect  to  your  entry.  If  you  do  make  the  con- 
comitant change  in  entry,  in  the  event  you  suggest  another  carrier 
would  come  into  that  market,  when  rates  rise  above  a  competitive  level. 

Senator  Kennedy.  But  how  can  a  carrier  come  back  in?  I  would 
think  it  would  take  a  very  considerable  amount  of  investment,  and 
once  they  get  right  back  in,  the  fare  could  be  lowered  again  to  drive 
them  out.  I  would  think  the  people  would  bet  the  idea  pretty  quickly 
after  two  or  three  people  lose  their  shirts. 

INIr.  Barnum.  Many  of  the  markets  you  are  talking  about  are  mar- 
kets that  could  be  served  or  not  served  by  existing  carriers. 

The  easy  case,  of  course,  is  a  market  in  which  a  carrier  serves  both 
end  points  anyway,  let's  say  New  York-Cincinnati.  TWA  may  be 
serving  Cincinnati  from  Chicago,  and  New  York  from  a  number  of 
places.  It  drops  the  New  York-Cincinnati  leg  for  one  reason  or 
another,  or  perhaps  it  is  not  now  in  the  New  York-Cincinnati  leg.  But 
if  other  carriers  were  to  raise  fares  as  you  suggest,  TWA  would 
promptly  go  right  back  into  the  New  York-Cincinnati  market.  That 
is  the  easy  case. 

The  more  difficult  case  would  be  a  market  where  a  carrier  did  not 
have  a  base  at  one  of  the  end  points. 

In  any  event,  you  must  have  a  different  practice  with  respect  to 
entry  in  order  to  make  rate  flexibility  meaningful  and  to  avoid  the 
very  result  you  are  talking  about. 

Senator  Kennedy.  How  do  you  know  they  just  wouldn't  go  ahead 
and  charge  the  ceiling,  too.  Perhaps  if  one  carrier  found  out  that 
another  is  going  up  to  the  ceiling,  the  first  carrier  would  say,  well, 
since  Airline  X  is  charging  the  ceiling  and  getting  a  good  return 
on  investment,  I  think  we  will,  too,  and  then  we  would  end  up  having 
the  same  kind  of  competition  that  you  have  outlined  earlier? 

Mr.  Barnu:\i.  Well,  I  think  you  would  find  there  would  be  a  number 
of  carriers  that  would  charge  a  higher  rate  at  those  times  of  the  day; 
for  example,  where  there  is  such  a  demand  that  they  can  get  it. 

But  what  we  would  like  to  see  happen  is  illustrated  in  the  hypotheti- 
cal case  of  Chicago-Los  Angeles.  It  may  be  that  the  6  p.m.  flight  would 
find  a  rate  toward  the  high  end  of  the  zone  because  there  is  high 
demand  for  it,  there  are  a  lot  of  people  that  want  to  fly  at  that  time, 
and  indeed  the  major  carriers,  the  trunkline  carriers,  might  charge 
the  same  rate  at  the  high  end  of  the  scale.  But  price  flexibility  would 
permit  them  to  charge  a  lower  rate  during  the  middle  of  the  day  when 
they  could  attract  people  to  use  planes  now  operating  with  a  lower 
load  factor,  such  as  the  2  p.m.  flight,  when  there  is  not  such  a  great 
demand.  You  could  get  price  flexibility  which  would  spread  out  the 
demands  of  the  airline  and  increase  the  load  factor,  which  is  what  we 
are  really  shooting  at. 


8 

The  limits  of  the  zone  we  proposed  in  DPFI  ensure  that  neither 
dramatic  price  increases  nor  destructive  price  competition  would  en- 
sue. The  Department  position  rested  on  the  premise  that  greater  reli- 
ance on  market  forces  would  result  in  the  establishment  of  rates  based 
on  costs  and  would  afford  the  public  a  wider  and  better  range  of  price 
and  service  options.  We  emphasize  that  the  lack  of  price  competition 
in  the  air  industry  was  the  primary  cause  of  "seat  wars"  and  other 
service  competition  which  resulted  in  undue  unused  capacity  and  in- 
flated cost  levels. 

In  its  Domestic  Passenger  Fare  Investigation  decision,  the  Board 
did  recognize  that  fares  should  be  more  closely  alined  to  costs.  It 
largely  adopted  our  conclusion  that  low  fares  for  short-haul  passengers 
should  not  be  subsidized  by  higher  fares  for  long-haul  passengers. 

SMALL    TOWN    SERVICE     (CROSS-SUBSIDY) 

Senator  Kennedy.  Well,  now,  I  come  from  a  part  of  the  country 
where  we  had  up  to — well,  the  last  8  or  9  years  we  had  service  into  a 
number  of  smaller  communities  in  Massachusetts.  We  had  air  service 
into  New  Bedford,  Worcester,  Springfield,  down  in  Hyannis,  and  of 
course  that  was  replicated  in  a  variety  of  different  smaller  communi- 
ties all  over  northern  New  England. 

As  you  are  probably  aware.  Northeast  flew  in  New  England  and 
then  they  got  their  ticket  to  go  down  to  Miami  and  they  primarily 
focused  on  that,  and  they  claimed  at  least  to  use  cross  subsidy.  They 
abandoned  New  England  routes.  I  think  there  is  one  flight  a  day  in 
through  Hyannis  and  the  Islands,  and  the  smaller  airlines  have  taken 
over,  and  let  me  say  quite  frankly  they  have  been  very  good,  at  least 
in  our  part  of  the  country,  at  least  in  the  areas  of  New  England  in 
which  I  have  traveled. 

But  if  you  reject  the  cross-subsidy  argument  aren't  you  just  saying 
that  you  are  virtually  abandoning  some  of  these  smaller  communities, 
that  maybe  they  will,  as  took  place  down  on  Cape  Cod,  with  Down- 
East  Air  Lines  or  Pilgrim  Air  Lines  that  fly  out  to  Provincetown ; 
aren't  you  really  saying  to  smaller  communities — and  I  am  sure  this 
is  true*  in  other  parts  of  the  country— you  fellows  are  on  your  own. 
If  there  is  an  enterprising  smaller  company  that  can  put  together  the 
financing  and  find  the  pilots  and  all  the  rest,  maybe  you  will  get  good 
service,  but  otherwise  you  are  on  your  own.  Aren't  you  telling  that  to 
hundreds  of  smaller  communities  all  over  the  country  by  this 
suggestion  ? 

Mr.  Barnum.  I  think  not.  I  think  we  should  avoid  confusing  a  num- 
ber of  the  subelements  of  the  cross-subsidy  question. 

The  principal  issue  addressed  bv  the  Board  in  the  Domestic  Pas- 
senger Fare  Investigation  proceeding  I  am  talking  about  came  up  in 
the  context  of  fare  construction  and  the  way  in  which  an  airline  should 
build  up  its  fares  related  to  its  cost :  A  certain  amount  to  ticket  the  pas- 
senger ;  a  certain  amount  per  mile  for  the  first  500  miles ;  and  a  de- 
creasing amount  for  further  miles.  ,  . 

We  felt  at  that  time  the  long-haul  passenger  was  subsidizing  the 
short-haul  passenger.  For  example,  because  the  passenger  going  from 
New  York  to  San  Francisco  had  very  few  other  ways  in  which  to  take 
that  trip,  the  airlines  were  able  to  charge  him  a  higher  fare  relative 


to  cost  than  they  were  in  the  situation,  say,  from  Boston  to  New  York, 
where  there  were  alternative  means  of  transportation  and  where  the 
air  carrier  had  to  take  into  account  the  fares  of  Amtrak  and  of  inner- 
city  buses.  Because  of  the  intermodal  competition,  the  shorter  haul 
fares  were  lower  and,  to  a  degree,  we  felt,  cost-subsidized  by  the  long 
hauls.  That  is  just  an  economic  analysis  of  what  it  costs  the  air  carrier 
to  operate  long  haul  and  short  haul.  That  is  the  cross  subsidization 
that  we  objected  to.  and  the  CAB  objected  to,  in  Phase  9  of  the  Domes- 
tic Passenger  Fare  Investigation. 

I  think  that  position  is  entirely  appropriate  and  I  don't  think  your 
question  was  really  criticizing  that  kind  of  position  on  cross- 
subsidization.  So  I  would  like  to  put  that  asifle  for  a  minute. 

I  would  also  like  to  put  aside  the  problam  created  by  seasonal 
demands.  When  you  talk  about  the  Islands  and  Cape  Cod — and  I  fly 
those  same  flights  myself — you  are  talking  about  a  seasonal  demand, 
and  that  obviously  presents  a  separate  problem. 

But  let's  talk  now  about  the  smaller  communities  that  are  in 
jeopardy  of  not  getting  continued  service,  if  that  service  is  not  eco- 
nomic and  cannot  be  cross-subsidized  by  the  profitable  routes  that  the 
carrier  services.  Now,  of  course,  there  is  at  the  present  time  a  local 
subsidy  operation  available  to  the  CAB.  It  is  exercised  now  at  the 
level  of  about  $68  million  last  year  and  about  $66  million  in  the  forth- 
coming budget.  By  and  large,  local  subsidies  have  been  going  down, 
relatively,  as  inflation  has  come  along. 

To  the  extent  that  a  trunk  line  cannot  economically  serve  a  smaller 
community,  we  do  not  think  it  should  be  required  to  continue  to  pro- 
vide that  service.  In  the  last  5  years,  we  have  seen  a  dramatic  sub- 
stitution of  second  level  service  for  some  of  the  trunkline  service  that 
previously  existed.  The  very  region  of  the  country  you  are  talking 
about  is  a  dramatic  example  of  that.  Allegheny  has  provided  substi- 
tuted service  in  a  number  of  cities  that  it  previously  served  or  that 
Mohawk  served  prior  to  the  Allegheny-Mohawk  merger.  New  England 
speaks  very  well  to  the  point  that  many  carriers  in  a  less  regulated 
climate  would  be  prepared  to  come  in  and  provide  the  service  that 
you  are  talking  about. 

The  specific  proceeding  before  the  CAB  on  New  England  service 
laid  out  a  good  record  where  service  could  be  provided  by  trunk  car- 
riers and  secondary  carriers,  and  it  also  gave  you  some  evidence  that 
intercity  passenger  services  such  as  buses  were  available  to  get  people 
from  Bangor  to  New  York  or  Bangor  to  Boston  and  there  was  not 
the  need  for  certificated  air  service  as  existed  in  some  other  parts  of 
the  country. 

I  agree  with  you  that  it  is  something  we  have  to  keep  our  eye  on, 
but  I  don't  believe  you  should  permit  cross-subsidy  as  the  answer. 

Would  you  like  me  to  pursue  that? 

Senator  Kexxedy.  Why  don't  vou  continue.  We  will  come  back  to 
this. 

DESTRUCTIVE    COMPETITION 

Mr.  Barnum.  The  Board  was  unwilling  at  that  time,  however,  to 
adopt  the  broader  principle  of  pricing  flexibility,  constrained  only  by 
costs. 


10 

Senator  Kennedy.  In  reaching  this  position  you  must  have  done 
some  work  or  some  studies  that  would  give  you  some  assurances  that 
you  wouldn't  have  cutthroat  competition  in  this  kind  of  thing  and 
drive  people  out  of  the  market.  Have  you  studied  this  in  reaching  this 
decision  on  pricing  flexibility  and  expediting  decisionmaking?  What 
about  cutthroat  competition  that  would  destroy  the  competition  basi- 
cally ?  You  are  satisfied  that  that  won't  be  the  case  ? 

Mr.  Barnum.  We  are.  We  did  do  just  that  examination  and  we 
submitted  some  of  that  evidence  in  Phase  9  in  the  Domestic  Passenger 
Fare  Investigation. 

I  think  if  you  combine  this  with  easier  entry  provisions,  you  would 
not  get  the  cutthroat  competition  to  drive  competitors  out.  We  are 
not  talking  about  requiring  the  CAB  to  permit  destructive  price 
competition.  If  you  will  permit  greater  flexibility  entry,  you  will 
get  threshold  pricing  in  these  markets  so  that  the  carriers  who  are 
in  these  markets  will  price  at  a  level  just  high  enough  to  discourage 
the  other  carriers  able  to  come  in  from  coming  in  because  the  very 

startup  costs  will  prevent  them  from  coming  in  and  making  it 

Senator  Kennedy.  "S'ou  think  that  this  threshold  cost  is  the  most 
effective  cost  for  the  consumer? 

Mr.  Barnum.  That  has  got  to  be  the  most  effective  cost  to  the 
consumer;  yes. 

Now,  there  has  to  be  a  basic  cost  element  in  here  that,  of  course, 
we  in  the  Department  of  Transportation  are  always  mindful  of.  We 
are  not  just  talking  about  selling  oranges.  We  are  talking  about  selling 
air  transportation.  There  has  to  be  a  very  basic  and  substantial  cost 
here  for  safety.  We  are  mindful,  as  I  am  sure  you  are,  of  the  ingre- 
dients of  operating  an  airline.  We  are  not  in  any  way  inviting  you  to 
open  up  the  pricing  of  transportation  so  that  safety  would  be 
derogated. 

Another  procedural  problem  associated  Avith  pricing  is  CAB  delay 
in  deciding  whether  rates  are  reasonable. 

SAFETY     AND    COMrETITION 

Senator  Kennedy.  Have  you  got  any  study  about  the  performance 
of  new  carriers  in  the  area  of  competition  on  the  basis  of  safety  ?  Have 
you  drawn  any  conclusion  or  made  any  study  of  how  much  of  an 
issue  tliat  would  be  or  Avliether  that  is  a  question  to  be  resolved? 

Mr.  Barnum.  It  hasn't  been  an  issue  among  trunk  carriers  because 
there  haven't  been  any  new  trunk  carriers.  It  is  an  issue  when  we  talk 
about  air  taxies,  and  "this  is  a  very  serious  problem.  I  am  afraid  our 
record  of  accidents  of  air  taxies  is  not  as  good  as  we  would  like.  A 
lot  of  these  people  are  starting  up  and  do  not  have  all  the  elaborate 
safety  practices  and  manuals  the  trunk  carriers  have  been  able  to 
develop  over  the  years. 

Senator  Kennedy.  Wliat  about  intrastate  carriers,  in  terms  of  safety. 
Isn't  that  a  problem  ? 

Mr.  Barnum.  I  think  the  safety  record  of  the  principal  intrastate 
carriers  is  excellent. 

Senator  Kennedy.  But  how  will  you  make  sure  that  is  going  to  be 
the  case  in  other  places? 

Mr.  Barnum.  Well,  of  course,  the  FA  A  has  broad  authority  with 
both  certification  of  types  of  aircraft  and  maintaining  the  operating 


11 

status  of  aircraft.  That  is  really  more  an  FAA  function.  It  would 
address  itself  to  any  type  of  aircraft  being  operated,  I  agree  Avith 
you,  however,  that  it  is  something  we  should  continue  to  keep  our 
eye  on,  but  given  that  mandate  to  the  FAA,  I  think  we  can  put  it  to 
one  side. 

Mr.  Barxum.  I  made  reference  to  the  CAB  and  its  procedural  delay 
in  deciding  whether  rates  are  reasonable.  We  believe  the  CAB  should 
be  required  to  render  a  final  decision  on  rate  proposals  promptly. 
Also,  streamlined  procedures  should  enable  the  Board  to  dispose  of 
some  cases  on  the  basis  of  pleadings  alone,  without  formal  hearings. 
Large-scale  investigations  such  as  the  DPFI  may  take  longer,  of 
course. 

The  Administration  strongly  supports  greater  pricing  flexibility 
for  the  airline  industry.  We  expect  that  our  legislation  will  incorpo- 
rate proposals  for  pricing  flexibility  and  expedited  decisionmaking. 

cab's  secoxd  major  power  :  industry  extry  and  route  entry 

Another  major  problem  with  the  present  regulatory  system  is  the 
Board's  restrictive  entr}^  and  exit  policies.  These  policies  have  also 
restricted  competition  and  increased  costs  to  consumers. 

Section  401  of  the  Federal  Aviation  Act  gives  the  CAB  control  over 
entry  into  the  industry;  the  Board  is  given  authority  to  determine 
which  carriers  may  operate  in  scheduled  interstate  service  and  on 
which  routes  they  may  operate.  The  applicant  must  be  found  fit, 
willing,  and  able  to  perform  the  service  properly,  and  the  transporta- 
tion must  be  required  by  public  convenience  and  necessity.  CAB  per- 
mission is  also  required  for  exit. 

In  practice,  industry  entry  has  been  tightly  controlled.  Other  than 
the  16  carriers  operating  when  the  1938  act  took  effect,  there  has  not 
been  a  single  new  trunk  carrier  certificated  in  the  Board's  history. 
Through  merger,  the  16  original  trunks  have  shrunk  in  number  to  10 
which  account  for  90  percent  of  the  total  domestic  market.  The  Board 
has.  however,  certified  local  service  carriers,  some  of  which  are  now  as 
large  as  the  smaller  trunks. 

Until  recently,  and  especially  in  the  late  sixties,  existing  carriers 
were  granted  applications  for  ncAv  routes,  thereby  substantially  re- 
ducing the  number  of  monopoly  markets.  In  the  last  few  years,  how- 
ever, the  CAB  has  put  into  effect  a  de  facto  moratorium  on  route 
awards.  Xew  route  applications  have  not  been  set  for  hearing;  proc- 
essing applications  which  had  ben  set  for  hearing  has  ben  delayed. 
The  restrictive  policy  with  respect  to  new  carrier  entry  into  the  in- 
dustry has  now  been  matched  by  a  restrictive  policy  with  respect  to 
new  route  entry  for  established  carriers. 

The  economic  result  of  a  restrictive  CAB  policy  is  that  carriers  do 
not  enter  and  leave  markets  solely  for  business  and  profit  reasons.  New 
firms  are  discouraged  by  the  standards  applied  and  by  the  results 
they  see.  including  the  high  cost  of  the  application  process  and  the 
delay  in  Board  decisionmaking.  The  Board  has  protected  incumbent 
carriers  rather  than  encouraged  healthy  competition.  As  a  result,  in 
the  majority  of  trunk  markets,  most  passengers  are  carried  by  only 
one  or  two  airlines. 

The  administration  does  not  necessarily  believe  that  additional 
carriers  are  required  on  every  route  to  improve  the  working  of  the  air 


12 

transportation  system.  We  do  believe,  however,  that  the  present  system 
removes  the  ability  of  the  carriers  to  adjust  services  and  realine  the 
markets  they  serve  as  economic  conditions  warrant.  This  results  in 
increased  costs  to  the  public. 

The  present  system  also  does  not  recognize  the  importance  of  poten- 
tial competition  as  an  economic  force.  Thus,  the  carriers  on  an  existing 
route  need  not  be  concerned  about  new  competition  unless  the  Board 
has  a  route  case  pending.  In  such  circumstances,  the  existing  carriers 
may  be  less  diligent  in  providing  the  type  of  service  and  price  and 
quality  options  desired  by  the  public  than  they  would  be  if  they  were 
aware  that  a  competitor  could  enter  at  any  time  to  provide  new  or 
better  service. 

cab's   charter  restrictions 

Another  way  of  improving  competition  is  by  liberalizing  charter 
rules  and  thereby  offering  the  consumer  a  broader  range  of  price  and 
service  options. 

Senator  Kexnedy.  Is  your  view  consistent  with  the  minimum 
charter  floor  the  DOT  was  pushing  last  year  ? 

Mr.  Barxum.  I  would  like  to  clarify  the  minimum  charter  floor.  I 
believe  that  as  a  result  of  the  hearings  you  held  in  November,  efforts 
were  made  to  portray  as  much  controversy  within  the  administration 
as  possible,  and  there  was  a  good  deal  of  confusion. 

I  think  that  what  we  were  saying 

Senator  Kennedy.  Well,  we  are  glad  to  get  the  real  story,  now. 

Mr.  Barnum.  At  that  time  we  were  talking  in  the  context  of  Ad- 
ministration's seven  point  action  plan  that  was  directed  to  the  inter- 
national flag  carriers.  It  dealt  with  the  ways  in  which  we  could  im- 
prove the  economic  climate  and  practices  of  Pan  Am  and  TWA  and 
those  international  carriers  that  were  suffering  from  the  economic 
circumstances  of  a  flat  or  decreasing  international  market  and  huge 
fuel  cost  increases.  We  did  consider  among  other  things,  the  relation- 
ship between  scheduled  fares  on  the  North  Atlantic  and  charter  fares. 
At  that  time  there  was  still  debate  as  to  what  the  scheduled  fares 
should  be,  and  lATA  had  not  yet  come  in  with  a  total  package  for 
CAB  approval.  It  was  difficult  for  lATA  to  come  in  with  a  package 
for  scheduled  fares  because  they  did  not  have  any  idea  where  charter 
fares  would  be. 

We  thought  that  to  aid  lATA  agreement  or  at  least  to  facilitate 
informed  decision  by  the  scheduled  carriers,  it  would  be  useful  if  there 
were  from  the  CAB  some  indication  of  criteria  for  a  floor,  if  you 
will,  at  which  charters  would  operate. 

Now,  what  has  been  misunderstood  here  is  that  we  were  not  talking 
about  having  a  charter  fare  level  that  would  permit  all  charter  oper- 
ators, efficient  and  inefficient,  to  make  a  profit.  What  we  were  talking 
about  was  some  indication  as  to  where  charter  rates  would  be  so  that 
the  scheduled  carriers  could  predicate  their  fares  in  relation  to  the 
charter  floor. 

There  is  a  debate  still  raging  as  to  the  degree  of  CAB's  authority  to 
set  a  charter  floor  either  by  notice  or  proceeding,  and  that  I  think  we 
best  leave  to  the  CAB  and  the  courts  to  thrash  out. 

Senator  Kennedy.  Senator  Cannon  has  introduced  the  bill  to  make 
charter  service  more  widely  available,  which  I  had  the  pleasure  to  join 
him  on  [S.  421].  Do  you  support  that  legislation? 


13 

INIr.  Barnum.  We  are  going  to  be  testifying  before  Senator  Cannon 
next  week.  We  are  in  the  process  of  developing  onr  position  on  that 
bill.  There  is  much  in  it  that  we  have  supported  in  the  past  with 
respect  to  ITC's  and  other  forms  of  charter.  We  have  opposed  the 
CAB  proposal  to  drop  affinity  charters,  and  I  am  glad  to  see  the  CAB 
has  delayed  its  decision  in  that  respect. 

We  do  think,  particularly  at  a  time  when  we  are  interested  in  getting 
more  people  into  fcAver  planes,  that  the  charter  business  is  one  way  in 
which  we  should  be  able  to  increase  low-cost  transportation  with  sub- 
stantial savings  in  energy.  We  are,  therefore,  encouraged  to  see  Senator 
Cannon  and  yourself  and  others  focusing  on  this  very  important  issue, 
and  we  will  address  it  specifically  in  the  next  week. 

Senator  Kennedy.  INIr.  Ginther  is  here,  who  is  the  staff  director  of 
the  aviation  subcommittee.  So  you  will  be  seeing  a  lot  of  him  next 
week. 

Mr.  Barnum.  The  Administration  believes  a  fundamental  shift  is 
required  away  from  over-protection  of  existing  carriers  to  one  which 
focuses  on  consumer  needs  and  requires  that  more  weight  be  placed 
on  competitive  principles  in  evaluating  new  applications  for  entry. 
We  also  believe  that  the  CAB  should  not  be  permitted  to  delay  deci- 
sionmaking as  a  means  of  limiting  entry. 

SMALL    TOWN    SERVICE     (CROSS-SUBSIDY) 

Route  exit  has  in  some  cases  also  been  restrained  by  the  CAB. 
While  we  recognize  the  importance  of  service  to  communities  of  vary- 
ing sizes,  carriers  should  not  be  forced  to  lose  money  or  operate  on 
the  assumption  that  other  routes  will  subsidize  those  producing  in- 
adequate revenue.  Cross-subsidies  are  inefficient  economically  and  in 
practice  do  not  work. 

AVhere  communities  deem  service  essential,  the  carriers  operate  at 
a  loss,  and  the  route  does  not  justify  Federal  subsidy,  alternatives 
must  be  considered.  These  alternatives  include  replacement  services  by 
another  carrier  or  subsidies  by  the  community  itself. 

In  this  regard,  I  should  note  that  we  will  not  propose  any  immediate 
changes  in  the  local  subsidy  program.  However,  we  believe  the  CAB 
has  an  obligation  to  identify  the  cost  of  such  subsidies  by  route  and 
by  city.  This  has  not  been  done. 

The  Administration  strongly  supports  liberalization  of  entry  into 
the  air  carrier  industry  and  our  forthcoming  proposal  will  provide 
for  substantial  entry  and  exit  liberalization. 

CHAOS 

Senator  Kennedy.  How  do  you  respond  to  the  point  that  this  is 
going  to  let  a  lot  of  fly-by-night  outfits  come  in  and  skim  the  cream 
off  the  top  on  the  most  heavy  traveled  routes,  and  lead  to  instability 
in  these  major  market  areas? 

Mr.  Barnum.  Putting  aside  the  safety  question,  I  think  that  my 
comments  earlier  about  threshold  prices  are  my  first  answer. 

My  second  answer  is  you  really  can't  startup  an  airline  overnight 
and  start  providing  the  kind  of  cutthroat,  cut  price  service  that  you 
are  talking  about.  The  CAB,  of  course,  is  going  to  have  to  certificate 
them  as  a  carrier  and  the  FAA  authorize  them  to  operate.  I  think  it 
would  be  a  rather  fool-hardly  enterprise  for  someone  to  invest,  even 
on  a  lease  basis,  in  the  expensive  equipment  that  would  be  required 


14 

to  provide  air  transportation.  It  is  not  a  business  susceptible  to  a 
fly-by-night  operation. 

Senator  Kennedy.  So  I  gather  you  have  considered  the  possibility 
that  instability  and  disruption  of  service  might  occur,  and  you  are 
satisfied  that,  on  that  point  at  least,  there  is  no  real  difficulty  with  more 
competition. 

Mr.  Barnum.  Yes.  I  am  certainly  satisfied  in  that  respect.  I  ani  also 
satisfied  that,  given  the  economics  of  the  air  carrier  industry,  the  likeli- 
hood of  a  fly-by-night  operation  and  being  able  to  skim  the  cream  off 
a  major  market  in  the  face  of  already  entrenched  competition  from 
name  carriers  is  not  very  realistic. 

Obviously,  it  is  something  that  needs  to  be  watched  very  carefully. 
But  I  would  not  say  that  the  activities,  for  example,  of  PSA  and 
Southwest — going  into  the  intrastate  market  at  what  was  initially 
about  a  40  percent  cut  below  scheduled  fares — demonstrate  an  unde- 
sirable result.  I  think  it  is  a  very  good  result.  If  that  is  the  consequence 
of  a  fly-by-night  entry,  I  would  say  that  would  be  good. 

Or,  for  example,  where  carriers  operate  in  very  high  density  mar- 
kets, this  kind  of  service  is  likely  to  be  air  shuttle-type  service  at  which 
they  have  hourly  service  and  they  may  or  may  not  have  a  high  load 
factor,  depending  on  whether  or  not  they  have  to  add  an  extra  plane 
a  day.  It  is  basically  a  no-frill  service,  and  I  would  welcome  that.  But  I 
would  not  be  concerned  about  there  being  a  fly-by-night  entry  into  that 
market. 

If  another  one  of  the  major  trunk  lines  saw  a  market  that  it  thought 
it  could  impact  and  enter  under  our  relaxed  entry  provisions  and  pro- 
vide a  shuttle  from  New  York  to  Detroit,  for  instance,  I  think  that 
would  be  very  helpful. 

Our  air  carriers  are  very  concerned  as  to  how  they  can  keep  their 
aircraft  operating.  Their  goal  is  to  get  up  to  11  or  12  hours  a  day.  They 
will  schedule  aircraft  not  because  of  where  people  want  to  go  to,  but 
where  they  can  move  airplanes,  where  they  can  continue  using  them 
into  the  night.  For  example,  if  they  go  west  at  a  particular  time  of  day, 
do  they  get  there  in  time  to  be  able  to  fly  on  the  west  coast  at  a  particular 
time?  How  do  they  position  their  planes?  Those  are  very  important 
considerations  in  the  total  operation  of  an  airline. 

To  the  extent  you  give  carriers  freedom  of  entry,  or  more  entry  than 
they  have  now,  you  will  enhance  their  ability  to  use  their  aircraft  and 
to  react  quickly  as  the  market  changes  or,  as  indeed,  as  their  competi- 
tors decide  to  move  in  or  out  of  a  market. 

But  I  would  not  regard  the  possibility  of  a  fly-by-night  operation  as 
derogating  from  the  services  of  a  scheduled  carrier. 

cab's    third    major    power:    antitrust   immunity CAPACITY 

REDUCTION    AGREEMENTS    AND    OTHERS 

I  would  like  to  move  on  to  the  third  area  where  regulatory  practices 
can  be  improved. 

One  of  the  most  objectionable  features  of  present  CAB  regulation 
is  the  approval  of  capacity  reduction  agreements  in  our  domestic  mar- 
kets. At  present,  under  section  412  of  the  Federal  Aviation  Act,  if  the 
Board  finds  capacity,  pooling  and  other  anticompetitive  agreements 


15 

not  adverse  to  the  public  interest,  it  may  approve  them ;  in  so  doing, 
it  immimizes  them  from  action  under  the  antitrust  statutes. 

Capacity  agreements  were  originally  justified  because  of  immediate, 
short  term,  severe  financial  distress.  The  Board  has  since  permitted 
use  of  capacity  agreements  to  resolve  problems  of  unused  capacity,  fuel 
allocation,  and  low  profits  in  certain  markets.  By  apportioning  ca- 
pacity, such  agreements  effectively  determine  market  share.  As  a  result 
of  Board  actions,  capacity  limitation  agreements  have  proliferated  to 
the  point  where  about  29  percent  of  the  revenue  passenger  miles  of  the 
three  largest  carriers  are  now  covered  by  capacity  agreements.  One 
economic  effect  is  that,  given  the  level  of  service  provided,  fares  in 
covered  markets  are  excessive.  One  can  scarcely  imagine  agreements 
more  anticompetitive  in  their  effect.  Such  problems  are  far  better  re- 
solved through  market  forces  operating  in  a  competitive  environment. 

DOT  opposed  the  capacity  agreements  before  the  Board  and  has 
joined  with  the  Antitrust  Division  of  the  Justice  Department  to 
oppose  approval  of  the  agreements  before  the  District  of  Columbia 
Court  of  Appeals. 

In  contrast,  some  agreements  arguably  subject  to  challenge  under 
antitrust  laws  do  serve  valid  transportation  objectives.  These  include 
interline  agreements,  airline  scheduling  committee  agreements  at  con- 
gested airports,  equipment  leases,  fuel  supply  agreements,  reservation 
and  ticketing  arrangements  and  technical  agreements  with  foreign  air 
carriers. 

We  distinguish  between  the  two  types  of  agreements,  the  one  anti- 
competitive in  a  way  w^iich  contributes  to  economic  inefficiency,  the 
other  which  meets  necessary  transportation  objectives.  The  Adminis- 
tration believes  that  anticompetitive  agreements  such  as  those  for  ca- 
pacity limitation  should  be  restricted  or  eliminated  but  that  agree- 
ments which  serve  efficient  transportation  needs  should  be  continued. 

Senator  Kennedy.  If  the  agreements  are  not  in  restraint  of  trade 
then  they  don't  violate  the  antitrust  law  in  any  event.  These  areas  that 
you  have  outlined  seem  to  be  reasonable  agreements,  so  why  do  you 
need  the  exemption,  in  any  event? 

Mr.  Barnum.  There  are  some  agreements  between  carriers  that  we 
think  are  appropriate,  that  either  arguably  or  clearly  might  result  in 
litigation.  They  might  be  regarded  as  allocation  of  market  or  market- 
share  agreements.  Some  of  the  joint  fare  agreements  they  have  could 
be  regarded  as  price  fixing  or  market-share  agreements. 

Senator  Kennedy.  As  I  understand  the  lawyers,  it  is  only  if  an  inter- 
carrier  is  unreasonable,  that  the  exemption  is  necessary.  If  it  is  rea- 
sonable it  does  not  violate  the  antitrust  laws,  even  though  it  is  an 
agreement  ? 

Mr.  Barnum.  What  constitutes  reasonableness  under  the  Sherman 
Act  is  a  very  tough  test  to  pass.  Even  putting  aide  merger  agreements, 
just  agreements  with  respect  to  ticketing  costs  or  even  use  of  airport 
at  a  particular  time  could  be  regarded  as  an  anticompetitive  or  an 
agreement  in  violation  of  the  Sherman  Act.  "Wliat  constitutes  reason- 
ableness in  the  Sherman  Act  is  not  what  a  non-antitrust  lawyer 

Senator  Kennedy.  Would  you  be  reassured  by  what  the  Department 
of  Justice  has  said  ?  Do  you  think  tliey  have  a  fair  opinion  in  temis  of 
the  governmental  policy,  and  that  their  input  would  be  guided  by  the 
legal  arm  of  the  Government? 


16 

Mr.  Barnum.  I  would  be  very  pleased  to  have  their  input.  I  do  not 
think,  however,  you  would  find  any  disagreement  between  us  as  to 
the  meaning  of  reasonableness  insofar  as  agreements  between  competi- 
tors is  concerned.  So  far  as  existing  law  requires,  I  think  you  will  find 
there  is  agreement. 

However,  we  distinguish  the  two  types  of  agreements,  and  I  will 
say  we  should  continue  antitrust  immunity  for  certain  types  of  agree- 
ments. In  our  judgement,  however,  the  airline  industry  is  strong 
enough  to  survive  and  prosper  without  blanket  antitrust  immunity. 

Section  408  of  the  act  authorizes  the  Board  to  approve  mergers. 
Mergers  may  be  permitted  unless  the  Board  finds  that  they  will  be  in- 
consistent with  the  public  interest,  would  create  a  monopoly  and 
thereby  restrain  competition,  or  would  jeopardize  another  nonpaity 
carrier.  In  our  view,  the  standard  used  by  the  Board  in  determining 
whether  mergers  or  consolidations  are  approved  should  be  changed  to 
require  that  competitive  principles  be  weighed  against  transportation 
needs. 

In  dot's  filings  to  date,  we  have  encouraged  the  CAB  to  find  less 
anticompetitive  solutions  to  many  of  the  problems  I  have  discussed. 
It  is  now  clear  that  more  decisive  reform  is  necessary.  In  times  of 
inflation,  recession,  and  energy  difficulties,  the  Nation  can  ill  afford  the 
extravagances  created  by  the  present  air  regulatory  system.  The 
administration  proposal  will  get  to  the  heart  of  the  difficulties  in  each 
of  the  areas  discussed  by  changing  the  regulatory  structure  which 
helped  produce  them.  The  air  regulatory  reform  bill  which  we  will 
present  will  address  each  of  these  issues  in  detail  and  will  implement 
the  basic  policy  objectives  which  I  have  outlined  in  my  testimony. 

We  look  forward  to  working  with  the  subcommittee  to  explore  each 
of  these  areas  in  more  detail.  We  share  the  desire  to  modernize  our 
regulatory  structure  and  let  the  fresh  air  of  competition  make  our 
transportation  industry  operate  more  efficiently  at  lower  cost  to  the 
consumers  we  serve. 

Thank  you  very  much,  Mr.  Chairman,  and  if  I  can  answer  any 
additional  questions,  of  course,  I  would  be  more  than  pleased  to  try  to 
do  so. 

Senator  Kennedy.  Well,  we  want  to  thank  you  for  your  presenta- 
tion, and  I  think  it  is  really  an  indication  of  the  desire  of  the  Depart- 
ment of  Transportation  to  carry  forward  what  President  Ford  out- 
lined in  his  state  of  the  Union  address  in  identifying  the  regulatory 
agencies  as  a  matter  of  concern,  and  trying  to  make  them  more  effec- 
tive, and  obviously,  as  far  as  your  Department  is  concerned,  you  are 
willing  to  move  ahead  in  these  directions  even  prior  to  the  time  of  the 
development  of  a  commission  to  deal  with  it.  I  think  that  that  is  really 
a  credit  to  the  De^^artment. 

Mr.  Barnum.  Thank  you. 

NEED    FOR    LEGISLATION 

Senator  Kennedy.  Let  me  ask  you — are  you  satisfied  these  steps  can 
be  taken  without  new  le<rislation? 

Mr.  Barnum.  I  think  that  new  legislation  would  accelerate  the  steps 
that  we  have  outlined.  Most  of  the  things  that  we  have  discussed  could 
be  done  by  the  Board — to  approach  entry  and  exit,  for  instance — dif- 


17 

ferently  than  it  is  done.  Certainly,  in  our  judgment,  the  Board  has 
authority  to  provide  greater  price  flexibility  than  it  has  in  the  past, 
I  think  in  general  they  could  do  much  of  what  we  recommend  under 
existing  law. 

Senator  Kennedy.  Is  there  anything  they  could  not  do  under  their 
existing  statute? 

Mr.  Barnum.  No;  I  think  they  could  adopt  as  Board  practice,  if 
you  will,  the  time  limits  that  we  have  suggested  with  respect  to  entry 
and  exit  and  rate  changes.  They  have  not.  As  I  stated,  some  of  the 
proceedings  have  been  unnecessarily  protracted  or  put  on  the  shelf, 
which  has  frustrated  much  of  the  innovation  that  we  think  is  avail- 
able to  the  industry. 

I  would  urge  this  subcommittee — if  you  find  the  Congress  is  not 
prepared  to  make  substantive  amendments  to  the  act — to  point  out 
ways  in  which  you  believe  that  the  existing  law  and  the  practices 
appropriate  under  the  existing  law  liave,  in  fact,  not  been  followed. 

Senator  Kennedy.  "Why  do  you  not  think  that  the  CAB  has  seen  the 
problem  the  way  that  you  have  seen  it  here  and  moved  on  its  own  into 
these  particular  areas?  You  have  no  monopoly  or  expertise  or  under- 
standing of  these  particular  issues.  What  is  your  view  about  why  they 
have  not  moved  into  these  particular  areas  before  ? 

Mr.  Barnum.  Well,  as  I  mentioned  in  my  statement,  the  CAB 
evolved  from  an  aq-ency  that  was  established  to  encourage  a  new  indus- 
try as  it  was  growing,  an  industry  which  required  a  certain  amount  of 
encouragement  and  protection,  and  which  required  a  certain  amount 
of  regulation  so  that  there  Avould  not  result,  in  its  early  days,  the  type 
of  cutthroat  competition  which  you  have  described  or  the  type  of  fly- 
by-niijht  entry  into  the  marketplace.  But  T  think  now  that  the  industry 
is  stabilized.  Nonetheless,  many  of  the  things  "v\e  think  the  CAB  should 
do  differently  it  is  continuing  to  do  the  same  way  it  did  when  the 
industry  was  developing.  The  way  they  address  a  problem  today  is 
the  way  they  addressed  it  10  years  ago.  I  think  we  have  gone  past  the 
point  where  we  should  continue  business  as  usual  with  respect  to  the 
air  carrier  industry. 

APPOINTMENT   OF    CAB   MEMBERS 

Senator  Kennedy.  Do  you  think  part  of  the  problem  has  been  the 
appointment  process,  the  selection  of  people  that  have  been  selected 
and  have  had  a  strong  orientation  toward  the  industry,  perhaps? 

What  role,  if  any,  does  the  DOT' have  in  making  recommendations 
for  the  CAB? 

I  am  not  trying  to  personalize  this,  but  I  am  interested  in  what  your 
impression  would  be,  not  limited  to  any  particular  administration,  but 
just  as  a  practice. 

Mr.  Barnum.  AVell,  I  share  A^our  concern  in  this  respect.  I  think  that 
I  would  judge  the  CAB  by  its  rules  and  not  by  its  personalities. 

I  think  that  the  Board  could  be  a  more  effective  instrument  in  the 
regulation  of  air  transportation,  and  it  may  very  well  be  that  those 
who  constitute  the  Board  are  an  essential  ingredient  in  making  it  more 
eft'ective.  I  think  it  is,  in  part,  the  tradition  into  which  each  new  mem- 
ber of  the  Board  steps  as  he  joins  the  Board  and  finds  out  the  way 
they  have  done  things  in  the  past  and  the  rules  of  the  past.  And  I  think 


51-146  O  -  76  -  pt.  1  -  : 


18 

the  CAB  is  guided  in  part  by  stare  decisis,  its  own  decisions  in  the 
past,  A  new  member  has  not  been  given  a  mandate  by  Congress  to 
change  what  the  Board  has  been  doing  in  the  past. 

For  someone  to  join  the  CAB,  and  to  go  in  there  and  say,  "No;  that 
is  all  wrong,  the  statute  means  otlierwise'" — I  think  he  would  be  trying 
to  upset  a  great  deal  that  the  courts  have  written  about  and  the  Board 
has  written  about,  and  certainly,  as  a  newcomer  he  would  feel  he  had 
better  find  out  how  the  Board  works, 

1  think  also  the  Board  has  been  concerned  about  continued  prosper- 
ity in  the  air  industr}',  and  properly  so.  To  the  extent  that  it  has  put 
siich  great  emphasis  on  that,  however,  I  think  that  lias  been  a  mis- 
take. I  think  making  a  goal  of  12  percent  return  on  investment  as  a 
principal  guiding  factor  in  Board  decisions  is  a  mistake.  I  would  be 
much  more  interested  in  seeing  the  Board  trying  to  focus  more  on 
increasing  load  factors  in  its  pi"icing  decisions  and  as  a  result  both 
saving  energy  and  mailing  the  carriers  more  profitable. 

With  respect  to  our  role  in  the  Department  as  to  who  goes  on  the 
CAB,  we  are  consulted,  of  course,  by  the  "\ATiite  Plouse  in  connection 
with  CAB  appointments  and  asked  for  recommendations  and  asked  to 
comment  on  people  that  have  been  recommended  by  others. 

Senator  Kennedy,  Are  you  listened  to  over  there  ? 

Mr.  Barxum.  I  think  so. 

Senator  Kennedy.  Good. 

As  the  result  of  our  November  hearings,  the  staif  marie  some  sug- 
gestions wdth  regard  to  procedures  in  establishing  a  minimum  rate 
policy,  and  I  understand  you  had  some  people  looking  at  these  recom- 
mendation and  determining  how  they  might  be  implemented.  T  am 
just  wondering  if  you  are  prepared  to  say  anything  about  that  today? 

Mr,  Baknum.  Not  at  this  time,  sir. 

Senator  Kennedy.  ^\^ill  you  let  us  know  at  the  earliest  possible  time 
what  are  your  reactions  to  those  recommendations? 

Mr.  Barnuim,  I  would  like  to  advise  you  promptly  or  as  promptly  as 
I  can  just  what  our  timing  is  with  respect  to  commenting  on  those 
recommendations. 

[The  comments  referred  to  are  contained  in  a  letter  from  DOT  to 
Senator  Kennedy  which  is  printed  at  the  end  of  Mr.  Kutkze's  testi- 
mony on  February  18,  1975,  See  below,  pp.  691-92.] 

Senator  Kennedy.  I  suppose  on  the  matters  that  you  have  mentioned 
here  this  morning,  which  are  extremely  significant,  that  you  will  be 
developing  those  proposals  and  reconnnendations  in  greater  detail? 

Mr.  Barnum.  Yes. 

Senator  Kennedy.  Will  you  keep  us  informed  how  those  are  being 
developed  ? 

Mr.  BARNu:\r.  We  are  in  the  process  of  discussing  with  the  other 
agencies  of  the  executive  branch  the  various  details  of  the  three  main 
areas  that  I  have  outlined  to  you.  I  would  hope  that  we  could  continue 
to  hnve  the  dialog  betAveen  our  several  agencies  and  vour  staff  and  Mr. 
Ginther  and  the  staff  of  the  Commerce  Committee.  We  want  to  achieve 
somethin<i  that  is  meaningful  and  realistic  in  terms  of  positive  enact- 
ment and  that  will  addr-ess  the  basic  issues  that  we  see. 

Senator  Kennedy.  Well,  we  ha-^-e  enjoyed  that  cooperation  in  the 
past,  and  A^e  have  no  reason  to  feel  that  it  would  not  continue  in  the 
future.  For  that,  we  are  very  appreciative.  T  think  it  is  a  strong  indica- 
tion of  the  ability  of  the  Congress  to  work  with  the  administration 


19 

and  the  agencies.  We  appreciate  that  and  we  have  found  it  very  in- 
fo raiative  and  very  helpful. 

I  want  to  thank  you  very^  much.  That  has  been  a  good  presentation. 

]Mr.  Barnum.  Thank  30U,  INlr.  Chairman. 

Prepared  Statement  of  John  W.  Barnum 

Thank  you  for  your  invitation  to  present  the  views  of  the  Administration  on  the 
important  subject  of  regulation  of  air  transportation  and  how  it  can  be  improved. 

The  Department  is  vitally  interested  in  the  issue.  Since  DOT'S  inception  in 
1967,  we  have  participated  in  many  proceedings  before  the  Civil  Aeronautics 
Board.  In  our  Board  filings,  the  Department  has  been  a  strong  advocate  of  im- 
proving the  economic  performance  of  air  transportation  through  increased  re- 
liance on  competitive  market  forces.  The  unifying  theme  that  runs  through  vir- 
tually all  of  our  filings  before  the  CAB  is  that  greater  reliance  on  competitive 
market  forces  will  improve  the  economic  performance  of  the  industry  and  result 
in  lower,  more  cost  related  rates,  will  reduce  excess  capacity  and  will  provide 
the  air  traveling  public  with  a  wider  and  more  desirable  range  of  service  and 
price  options. 

I  believe  we  are  now  at  a  regulatory  watershed.  For  the  past  several  months, 
the  administration  has  been  reviewing  the  transportation  regulatory  system  with 
a  view  to  improving  both  performance  and  economic  efiiciency.  The  reform  pro- 
posals presently  being  prepared  by  the  administration  mark  a  major  departure 
from  the  regulatory  regime  we  have  relied  upon  in  the  past.  The  administration 
will  submit  to  Congress  in  the  near  future  a  proposal  which  will  fundamentally 
redirect  our  air  transportation  regulatory  policy.  Your  hearings,  therefore  come 
at  an  opportune  moment.  Today  I  will  outline  the  administration's  position  on 
regulation  of  air  transportation. 

The  need  for  an  air  regulatory  reform  act  is  demonstrated  both  by  economic 
research  and  by  our  experience.  At  present,  for  example,  air  carriers,  shippers, 
and  passengers  frequently  face  a  web  of  restrictive  government  regulations  which 
stifle  competition,  discourage  innovation,  and  foster  inefficiency.  In  many  respects, 
the  present  air  regulatory  structure  is  outdated,  inequitable,  inefficient,  uneco- 
nomical and  irrational.  It  often  misplaces  incentive  and  disincentive,  distorts 
competitive  advantage,  protects  ineflScient  carriers  from  effective  competition, 
over-restricts  market  entry,  artifically  inflates  rates  and  misallocates  our  Na- 
tion's resources.  Under  the  current  system,  many  consumers  pay  an  artificially 
inflated  price  for  air  transportation  because  ratesetting,  unnecessary  entry  re- 
strictions, capacity  agreements  and  other  forms  of  shelter  from  competition  sanc- 
tioned by  the  Board  protect  the  least  eflScient  carriers,  permit  rates  substantially 
above  an  eflScient  cost  level  and  distort  competitive  market  forces.  The  resulting 
economic  waste  and  associated  inefficiency  is  substantial. 

The  present  air  regulatory  system  is  the  product  of  a  different  era.  While  the 
needs  and  conditions  on  which  air  regulation  was  first  predicated  some  40  years 
ago  have  changed,  the  goals  and  practices  of  government  regulation  have  not.  It 
is  unfortunately  a  truism  that  regulation  begets  further  regulation  and  that  regu- 
lations outlive  their  rationale. 

In  1938,  when  the  Civil  Aeronautics  Act  was  passed,  government  assistance 
through  protection,  subsidy,  promotion  and  regulation  was  a  necessary  factor  in 
the  development  of  a  new  and  struggling  industry.  Thirty-seven  years  later,  con- 
ditions have  changed.  The  air  travel  market  is  mature.  Traffic  has  grown.  Growth 
has  led  to  stability.  The  industry  is  vigorous.  But  the  regulatory  system  which 
protected  it  and  made  it  that  way  has  not  kept  pace. 

The  problems  once  faced  have  been  largely  solved.  Now  we  are  faced  with  prob- 
lems that  are  a  byproduct  of  that  success.  The  promotion  which  once  fostered 
growth  now  causes  inefficiency.  The  restriction  which  once  guaranteed  stability 
now  retard  competition.  The  regulatory  protection  which  once  insured  existence 
now  prevents  savings. 

We  need  a  better  system  which  comes  closer  to  producing  optimum  social  and 
economic  results,  one  which  maximizes  efficiency,  economies  and  consumer  op- 
tions and  which  produces  the  best  mix  between  low-cost  and  hisrh-quality  service. 

The  most  pressing  problems  in  the  airline  regulatory  field  cluster  in  three  broad 
areas :  ratemakins:  and  pricing  flexibiUtv,  market  entry  and  exit,  and  anticom- 
petitive agreements.  Each  area  is  in  need  of  reform.  Let  me  identify  what  we  see 
as  the  major  difficulties  involved,  the  actions  DOT  has  taken,  and  the  future 
direction  which  the  administration  suggests. 


20 

A  major  difficulty  with  CAB  policy  has  been  ratemaking  and  the  carrier  in- 
ability to  raise  and  lower  rates  in  response  to  the  demands  of  the  marketplace. 
This  in  turn  forces  carriers  into  costly  and  uneconomic  service  competition,  de- 
prives the  traveling  public  of  the  range  of  price/service  options  which  would 
otherwise  be  available,  and  results  in  substantial  economic  waste  and  inefBciency. 

Section  404  of  the  Federal  Aviation  Act  requires  carriers  to  establish  just 
and  reasonable  rates.  Section  1002  permits  the  Board  to  prescribe  maximum  or 
minimum  rates  if  it  is  of  the  opinion  that  the  rates  charged  are  unjust,  unreason- 
able, preferential  or  discriminatory.  In  deciding  whether  a  rate  is  too  high  or 
low  the  Board  takes  into  account,  among  other  factors,  whether  the  fare  is  com- 
pensatory, providing  the  carrier  with  sufficient  revenue. 

The  result  of  the  Board  administration  of  these  sections  has  been  the  elimina- 
tion of  price  competition,  thereby  restricting  competition  to  service.  Passengers 
find  airlines  competing  for  their  patronage  through  elaborate  cuisine,  free  drinks, 
attractive  stewardess,  multicolored  planes,  and  piano  bars.  But  they  do  not  have 
a  menu  where  different  quality  service  is  related  to  different  prices.  This  is  a 
serious  loss. 

Many  passengers  would  prefer  the  opportunity  to  select  carriers  based  on  price 
in  addition  to  type  of  service.  Some  passengers  would  prefer  high  load-factor, 
low-frill,  low-fare  service.  Others  are  willing  to  pay  for  more  comfortable  and 
more  costly  service.  Present  procedures  do  not  produce  that  variety  of  price/ 
service  options.  Often,  present  regulation  causes  fares  well  above  those  which 
would  result  in  a  more  competitive  air  transportation  market.  With  prices  fixed 
at  levels  above  market  rates,  carriers  compete  on  the  basis  of  service.  Such  serv- 
ice competition  produces  substantial  unused  capacity  and  unnecessary  low  load- 
factors,  presently  averaging  about  57  percent.  In  the  transcontinental  market, 
for  example,  rates  are  set  sufficiently  high  to  permit  the  carriers  to  earn  a  rea- 
sonable return  with  load  factors  in  the  mid-40  percent  range.  DOT  believes  that 
many  transcontinental  passengers  would  prefer  the  minor  inconveniences  asso- 
ciated with  higher  load  factors  in  return  for  less  expensive  tickets.  In  a  more 
competitive  market,  carriers  would  respond  by  providing  such  low  cost  service. 

One  recent  study  showed  that  at  an  average  load  factor  of  7.5-percent  prices 
could  be  27  percent  lower  than  at  a  50-percent  load  factor.  While  75-percent  load 
factors  are  higher  than  DOT  has  recommended  in  most  markets,  this  example 
illustrates  the  potential  savings  associated  with  pricing  flexibility. 

Present  Board  policies  encourage  lower  than  optimal  load  factors.  DOT's 
testimony  in  the  CAB's  Domestic  Passenger  Fare  Investigation  (DPFI)  showed 
that  when  load  factors  increase  beyond  a  break-even  level  (defined  to  include 
profits),  carriers  schedule  additional  capacity,  thereby  lowering  load  factors  to 
the  break-even  level  again. 

Because  of  this  inflexibility,  in  the  Domestic  Passenger  Fare  Investigation. 
DOT,  among  other  things,  urged  the  Board  to  establish  a  15-percent  "zone  of 
reasonableness"  above  and  below  the  fare  structure  curve.  The  zone  would  not 
apply  in  monopoly  markets,  as  defined  by  the  CAB,  where  the  Board  would 
continue  to  review  and  suspend  rates.  Within  the  zone,  carriers  would  be  per- 
mitted to  compete  on  the  basis  of  price,  free  from  regulatory  interference.  Out- 
side the  zone,  the  Board  could  continue  to  suspend  rates  it  believed  unlawful 
under  its  ratemaking  standards.  The  limits  of  the  zone  ensure  that  neither 
dramatic  price  increases  nor  destructive  price  wars  would  ensue.  The  Depart- 
ment position  rested  on  the  premise  that  greater  reliance  on  market  forces 
would  result  in  the  establishment  of  rates  based  on  costs  and  would  afford  the 
public  a  wider  and  better  range  of  price/service  options.  We  emphasized  that  the 
lack  of  price  competition  in  the  air  industry  was  the  primary  cause  of  "seat 
wars"  and  other  service  competition  which  resulted  in  undue  unused  capacity, 
inflated  cost  levels,  and  too  rapid  obsolescence  of  equipment. 

In  its  DPFI  decisions,  the  Board  did  recognize  that  fares  should  be  more 
closely  aligned  to  costs.  It  largely  adopted  our  conclusion  that  low  fares  for 
short-haul  pnssengers  should  not  be  subsidized  by  higher  fares  for  long-haul 
passengers.  The  Board  was  unwilling  at  that  time,  however,  to  adopt  the  broader 
principle  of  pricing  flexibility,  constrained  only  by  costs. 

Another  procedural  problem  associated  with  nririnsr  is  CAB  deiav  in  deciding 
whether  rates  are  reasonable.  We  believe  the  CAB  should  be  required  to  render 
a  final  decision  on  rate  proposals  promptly.  Also,  streamlined  Procedures  should 
enable  the  Board  to  dispose  of  some  cases  on  the  basis  of  piead'n.n'c  alone,  with- 
out formal  hearings.  Large  scale  investigations  such  as  the  DPFI  may  take 
longer,  of  course. 


21 

The  administration  strongly  supports  greater  pricing  flexibility  for  the  airline 
industry.  We  expect  that  our  legislation  will  incorporate  proposals  for  pricing 
tlexibility  and  expedited  decisionmaking. 

Another  major  problem  with  the  present  regulatory  system  is  the  Board's 
restrictive  entry  and  exit  policies.  These  policies  have  also  restricted  competition 
and  increased  costs  to  consumers. 

Section  401  of  the  Federal  Aviation  Act  gives  the  CAB  control  over  entry  into 
the  industry;  the  Board  is  given  authority  to  determine  which  carriers  may 
operate  in  scheduled  interstate  service  and  on  which  routes  they  may  operate. 
The  applicant  must  be  found  fit,  willing,  and  able  to  perform  the  service  properly, 
and  the  transportation  must  be  required  by  public  convenience  and  necessity! 
CAB  permission  is  also  required  for  exit. 

In  practice,  industry  entry  has  been  tightly  controlled.  Other  than  the  16 
carriers  operating  when  the  1938  Act  took  effect,  there  has  not  been  a  single  new 
trunk  carrier  certificated  in  the  Board's  history.  Through  merger  the  16  original 
trunks  have  shrunk  in  number  to  10  which  account  for  90  percent  of  the  total 
domestic  market.  The  Board  has,  however,  certified  local  service  carriers,  some 
of  which  are  now  as  large  as  the  smaller  trunks. 

Until  recently,  and  especially  in  the  late  sixties,  existing  carriers  were  granted 
applications  for  new  routes,  thereby  substantially  reducing  the  number  of  mono- 
poly markets.  In  the  last  few  years,  however,  the  CAB  has  put  into  effect  a  de 
facto  moratorium  on  route  awards.  New  route  applications  have  not  been  set  for 
hearing ;  processing  applications  which  had  been  set  for  hearing  has  been  delayed. 
The  restrictive  policy  with  respect  to  carrier  entry  has  now  been  matched  by  a 
restrictive  policy  with  respect  to  route  entry. 

The  economic  result  of  a  restrictive  CAB  policy  is  that  carriers  do  not  enter 
and  leave  markets  solely  for  business  and  profit  reasons.  New  firms  are  dis- 
couraged by  the  standards  applied  and  by  the  results  they  see,  including  the  high 
cost  of  the  application  process  and  the  delay  in  Board  decisionmaking.  The  Board 
has  protected  incumbent  carriers  rather  than  encouraged  healthy  competition. 
As  a  result,  in  the  majority  of  trunk  markets,  most  passengers  are  carried  by  only 
one  or  two  airlines. 

The  administration  does  not  necessarily  believe  that  additional  carriers  are 
required  on  every  route  to  improve  the  working  of  the  air  transportation  system. 
We  do  believe,  however,  that  the  present  system  removes  the  ability  of  the  car- 
riers to  adjust  services  and  realine  the  markets  they  serve  as  economic  conditions 
warrant.  This  results  in  increased  costs  to  the  public. 

The  present  system  also  does  not  recognize  the  importance  of  potential  compe- 
tition as  an  economic  force.  Thus,  the  carriers  on  an  existing  route  need  not  be 
concerned  about  new  competition  unless  the  Board  has  a  route  case  pending.  In 
such  circumstances,  the  existing  carriers  may  be  less  diligent  in  providing  the 
type  of  service  and  price/quality  options  desired  by  the  public  than  they  would 
be  if  they  were  aware  that  a  competitor  could  enter  at  any  time  to  provide  new 
or  higher  quality  service. 

Another  way  of  improving  competition  is  by  liberalizing  charter  rules  and 
thereby  offering  the  consumer  a  broader  range  of  price  and  service  options. 

The  administration  believes  a  fundamental  shift  is  required  away  from  over- 
protection  of  existing  carriers  to  one  which  focuses  on  consumer  needs  and  re- 
quires that  more  weight  be  placed  on  competitive  principles  in  evaluating  new 
applications  for  entry.  We  also  believe  that  the  CAB  should  not  be  permitted  to 
delay  decisionmaking  as  a  means  of  limiting  entry. 

Route  exit  has  in  some  eases  also  been  restrained  by  the  CAB.  While  we  recog- 
nize the  importance  of  service  to  communities  of  varying  sizes,  carriers  should 
not  be  forced  to  lose  money  or  operate  on  the  assumption  that  other  routes  subsi- 
dize those  producing  inadequate  revenue.  Cross-subsidies  are  ineflBcient  econom- 
ically and  in  practice  do  not  work. 

W^here  communities  deem  service  essential,  the  carriers  operate  at  a  loss,  and 
the  route  does  not  justify  federal  subsidy,  alternatives  must  be  considered.  These 
alternatives  include  replacement  services  by  another  carrier  or  subsidies  by  the 
community  itself. 

In  this  regard,  I  should  note  that  we  will  not  propose  any  immediate  changes 
in  the  local  subsidy  program.  However,  we  believe  the  CAB  has  an  obligation  to 
identify  the  cost  of  such  subsidies  by  route  and  by  city.  This  has  not  been  done. 

The  administration  strongly  supports  liberalization  of  entry  into  the  air  car- 
rier industry  and  our  forthcoming  proposal  will  provide  for  substantial  entry 
and  exit  liberalization. 


22 

One  of  the  most  objectionable  features  of  present  CAB  regulation  is  the  ap- 
proval of  capacity  reduction  agreements  in  our  domestic  markets.  At  present, 
under  section  412  of  the  Federal  Aviation  Act,  if  the  Board  finds  capacity,  pooling 
and  other  anticompetitive  agreements  not  adverse  to  the  public  interest,  it  may 
approve  them  ;  in  so  doing,  it  immunizes  them  from  action  under  the  antitrust 
statutes. 

Capacity  agreements  were  originally  justified  because  of  immediate,  short-term, 
severe  financial  distress.  The  Board  has  since  permitted  use  of  capacity  agree- 
ments to  resolve  problems  of  unused  capacity,  fuel  allocation,  and  low  profits  in 
certain  markets.  By  apportioning  capacity,  such  agreements  effectively  deter- 
mine market  share.  As  a  result  of  Board  actions,  capacity  limitation  agreements 
have  proliferated  to  the  point  where  about  29  percent  of  the  revenue  passenger 
miles  of  the  three  largest  carriers  are  now  covered.  One  economic  effect  is  that, 
given  the  level  of  service  provided,  fares  in  covered  markets  are  excessive.  One 
can  scarcely  imagine  agreements  more  anticompetitive  in  their  effect.  Such  prob- 
lems are  far  better  resolved  through  market  forces  operating  in  a  competitive 
environment. 

DOT  opposed  the  capacity  agreements  before  the  Board  and  has  joined  with 
the  Antitrust  Division  of  the  Justice  Department  to  oppose  approval  of  the  agree- 
ments before  the  District  of  Columbia  Court  of  Appeals. 

In  contrast,  some  agreements  arguably  subject  to  challenge  under  antitrust 
laws  do  serve  valid  transportation  objectives.  These  include  interline  agreements, 
airline  scheduling  committee  agreements  at  congested  airports,  equipment  leases, 
fuel  supply  agreements,  reservations  and  ticketing  arrangements,  and  technical 
agreements  with  foreign  air  carriers. 

We  distinguish  between  the  two  types  of  agreements,  the  one  anticompetitive 
in  a  way  which  contributes  to  economic  inefficiency,  the  other  which  meets  neces- 
sary transportation  objectives.  The  administration  believes  that  anticompetive 
agreements  such  as  those  for  capacity  limitation  ."-hould  be  restricted  or  eliminated 
but  that  agreements  which  serve  efficient  transportation  needs  should  be 
continued. 

Section  408  of  the  Act  authorizes  the  Board  to  approve  mergers.  Mergers  may 
be  permitted  unless  the  Board  finds  that  they  will  be  inconsistent  with  the  public 
interest,  would  create  a  monopoly  and  thereby  restrain  competition,  or  would 
jeopardize  another  nonparty  carrier.  In  our  view,  the  standard  used  by  the  Board 
in  determining  whether  mergers  or  consolidations  are  approved  should  be  changed 
to  require  that  competitive  principles  be  weighed  against  transportation  needs. 

In  DOT'S  filings  to  date,  we  have  encouraged  the  CAB  to  find  less  anticompeti- 
tive solutions  to  many  of  the  problems  I  have  discussed.  It  is  now  clear  that  more 
decisive  reform  is  necessary.  In  times  of  inflation,  recession  and  energy  difficul- 
ties, the  Nation  can  ill  afford  the  extravagances  created  by  the  present  air  regula- 
tory system.  The  administration  proposal  will  get  to  the  heart  of  the  difficulties 
in  each  of  the  areas  discussed  by  changing  the  regulatory  structure  which  helped 
produce  them.  The  air  regulatory  reform  bill  which  we  will  present  will  address 
each  of  these  issues  in  detail  and  will  implement  the  basic  policy  objectives  which 
I  have  outlined  in  my  testimony. 

We  look  forward  to  working  with  the  subcommittee  to  explore  each  of  these 
areas  in  more  detail.  We  share  the  desire  to  modernize  our  regulatory  structure 
and  let  the  fresh  air  of  competition  make  our  transportation  industry  operate 
more  efficiently  at  lower  cost  to  the  consumers  we  serve. 

Senator  Kkxxedy.  Our  second  witness.  Mr.  Eiicrman.  since  February 
1973.  has  served  as  chairman  of  the  Federal  Trade  Commission.  ITe 
has  directed  particular  attention  to  the  asrency's  responsibilities  in  the 
area  of  antitrust  laAv  enforcement.  He  is  outspoken  on  recfulatory 
reform,  and  we  are  anxious  to  have  his  views  on  CAB  regulation. 


STATEMENT   OF  LEWIS   ENGMAN.    CHAIRMAN, 
FEDERAL   TRADE   COMMISSION 

Thank  you,  Mr.  Chairman. 

Last  year  in  November  when  I  was  asked  to  present  the  Federal 
Trade  Commission's  vieAvs  on  governmental  restraints  in  the  market- 


23 

place,  I  expressed  concern  that,  like  so  many  fashionable  topics,  it 
would  be  the  subject  of  much  discussion  but  little  action.  It  is  grati- 
fying, therefore,  to  know  that  concern  with  this  vital  subject  has  con- 
tinued into  the  Mth  Congiess,  and  I  commend  this  committee  for  its 
role  in  continuing  the  inquiry. 

At  a  time  when  rising  prices  threaten  the  welfare  of  every  American, 
it  would  be  folly  indexed,  if  we  were  to  fail  to  address  this  one  area 
where  such  large  efficiencies  appear  to  be  available  to  us  without  off- 
setting economic  costs. 

I  am,  therefore,  pleased  to  be  here,  Mr.  Chairman,  and  to  have  this 
opportunity  to  offer  my  views  on  Federal  regulations  affecting  the 
airline  industry. 

Senator  Kennedy.  You  have  an  extensive  statement  here,  and  I  want 
you  to  proceed  in  whatever  way  you  feel  comfortable,  but  if  you  want 
to  highlight  it  or  summarize  it,  t  think,  that  will  be  helpful. 

Mr.  Engman.  I  normally  do  that,  Mr.  Chairman,  and  I  think  this 
Avill  not  take  long. 

Lest  someone  else  feel  compelled  to  say  it  for  me,  I  must  state  at 
the  outset  that  I  am  no  expert  on  the  technical  aspects  of  the  airline 
industry.  I  suggest,  however,  that  one  need  be  no  expert  to  perceive 
that  something  is  amiss  with  the  Avay  the  Government  currently  con- 
strues its  responsibility  toward  the  American  consumer  of  air 
transportation. 

As  spokesman  for  an  agency  broadly  charged  with  insuring  that  the 
consumer  receives  the  best  that  the  marketplace  can  provide  for  him, 
I  find  this  situation  disturbing. 

The  Fedeial  Trade  Commission  is  committed  to  the  principle  that 
people  are  best  served  by  the  effective  operation  of  a  free  and  com- 
petitive open  market. 

Today,  those  conditions  are  conspicuously  absent  in  our  airline 
industry.  They  are  absent  because,  over  35  years  ago,  the  Congress, 
after  examining  the  needs  of  a  then  infant  industry  struggling  to  raise 
capital,  decided  that  the  public  welfare  demanded  an  exception  to  the 
principle  of  competition — demanded  that  the  airline  industry  be  given 
partial  immunity  from  the  antitrust  laws  and  from  the  rigors  of  price 
competition.  The  arguments  mustered  in  support  of  that  decision  were 
essentially  two :  That  it  was  necessary  to  insure  the  industry  against 
cutthroat  competition,  and  that  it  was  necessary  to  provide  service 
to  localities  which  would  not  otherwise  receive  it. 

I  was  not  around  at  that  time.  I  did  not  hear  the  arguments  made  for 
and  against  what  was  done.  But  \yhatever  arguments  were  made  at 
that  time  and  whatever  industry  conditions  they  reflected  as  you  indi- 
cated, should  be  of  little  consequence  to  us  today.  For  the  relevant 
question  now  is,  where  has  it  all  brought  us  ? 

There  can  be  little  doubt  that  much  of  what  was  intended  has  been 
achieved.  Wliether  it  is  because  of,  or  in  spite  of,  regulation,  I  do  not 
know,  but  today  we  have  beyond  question  the  most  comprehensive  air 
transportation  network  in  the  world.  Moreover,  despite  the  current 
depleted  condition  of  several  of  our  major  carriers,  the  industry  over 
the  years  has  been  characterized  by  extraordinary  stability. 

SERVICE    COMPETITION    AND   EXCESS   FLIGHTS 

But  these  objectives  have  been  achieved  at  a  very  high  cost.  Our 
system,  which  severely  inhibits  price  competition  and  restricts  entry, 


24 

has  led  to  a  fare  structure  on  many  routes  which  economists  a^ree  is 
far  hig;her  than  that  which  would  prevail  if  the  industry  were  charac- 
terized by  price  competition  and  free  entry.  Several  conditions  flow 
from  this  fact. 

The  absence  of  any  real  price  competition  coupled  with  higher  than 
competitive  rates  leads  to  large  amounts  of  nonprice  competition.  One 
important  type  of  nonprice  competition  is  in  terms  of  frequency  of 
flights.  This  in  turn  leads  to  large  amounts  of  excess  capacity.  It  is 
not  unusual  today  for  several  planes  to  fly  almost  identical  schedules 
each  with  a  small  fraction  of  its  seats  filled  on  some  flights. 

Senator  Kennedy.  That  makes  two  of  us.  I  have  done  a  lot  of  flying. 

I  just  found  that  out  last  Thursday  evening  when  I  was  flying  to 
San  Francisco.  There  were  two  major  flights  within  5  minutes  of  each 
other,  both  going  nonstop  to  San  Francisco  from  Dulles  Airport. 
Noticing  that  we  had  these  particular  hearings,  I  looked  at  both  of 
them,  and  the  first  class  in  both  were  full  and  the  rest  about  one-third 
full,  and  they  landed  within  5  minutes  of  each  other.  I  have  a  staff 
assistant  who  is  consultant  for  our  Health  Committee,  who  makes  the 
trip  once  a  month,  and  he  has  been  doing  a  little  informal  review  of  this 
as  well,  and  has  found  the  exact  same  thing.  He  finds  it  going  both 
ways.  The  point  is  well  made. 

Mr.  Engman.  I  have  noticed  the  same  situation.  It  is  also  true  with 
other  pairs  of  markets ;  Chicago,  for  instance. 

In  short,  what  we  have  is  economic  waste — the  classic  cost-plus  syn- 
drome. The  air  passenger  who  finds  himself  next  to  an  empty  seat  may 
be  pleased  with  this  state  of  affairs.  He  is  able  to  spread  out  a  little. 
But  I  wonder  how  pleased  he  would  be  if  he  were  aware  that  he  had 
paid  not  only  for  the  seat  he  was  sitting  in,  but  for  the  seat  his  briefcase 
was  sitting  in,  too. 

In  addition,  fixed  rates  have  created  a  sort  of  phony  war,  a  war  in 
which  airlines  compete  for  business,  not  on  the  basis  of  price,  but  on 
the  basis  of  scheduling  and  comfort.  All  of  us  today  have  standing 
invitation  to  fly  Cheryl  or  Karen  or  Trixie  or  even  Bruce.  Those  invita- 
tions are  no  more  or  less  than  confessions  on  the  part  of  the  airlines 
that  our  decision  as  to  Avhich  to  fly  ]:)retty  much  boils  down  to  whether 
Cheryl  is  more  attractive  than  Bruce. 

This  bogus  competition  along  with  creature  comforts  and  the  pres- 
sure to  raise  the  number  of  flights  can  be  explained  by  the  simple  eco- 
nomics of  the  airline  industry.  We  start  with  an  increase  in  fares.  In 
the  absence  of  price  competition,  each  airline  tends  to  compete  away 
the  "profits"  from  the  fare  increase  by  engaging  in  various  forms  of 
increased  nonprice  competition. 

More  frills  are  added.  Witness  the  great  free-drink  battles  of  recent 
times  or  the  lounge  wars  of  some  time  back.  Often  flight  frequencies 
are  also  incrensed.  Unfortunately,  this  tends  to  reduce  overall  load  fac- 
tors on  all  the  planes.  Rates  of  return  go  down,  and  soon  we  are  told  a 
new  fare  increase  is  "required"  to  maintain  the  existing  rates  of  return. 
The  whole  nonj^roductive  cycle  starts  all  over  again. 

ANALOGY    TO    SECURITIES    INDUSTRY 

The  situation  is  analogous  to  that  which  existed  in  the  securities  in- 
dustry a  few  years  ago  when  it  was  operating  on  fixed  rates  across  the 
board.  Since  brokerage  houses  could  not  offer  the  customer  lower  rates. 


^25 

they  offered  frills — counseling  services  and  the  like.  The  brokerage 
houses  argued  that  these  frills  were  Avorth  the  extra  money,  but  the 
institutional  investors  knew  better,  and  they  made  the  brokers  give 
them  the  equivalent  of  rebates  under  the  table.  The  American  consumer 
of  air  transportation  does  not  have  that  power.  I  wonder  how  he  would 
act  if  he  did. 

Comfort  and  scheduling  are  undoubtedly  worth  something  to  con- 
sumers. But  are  they  worth  the  price  he  must  pay  for  them?  Obviously, 
they  are  worth  nothing  to  those  who  cannot  afford  to  fly  because  of  the 
high  prices.  There  is  evidence  which  suggests  also  that  they  are  not 
worth  it  even  to  those  who  can  and  do  fl}'.  If  it  were  true,  given  the 
choice,  some  people  would  choose  to  pay  the  higher  rates  for  deluxe 
or  frequent  service,  why  does  the  industry  and  the  Government  shy 
away  from  giving  them  that  choice?  For  surely  that  has  been  the  pat- 
tern in  recent  years. 

RESTRICTIOXS    OX    CHARTERS 

Our  current  system  of  regulation  has  prevented  the  entry  of  new 
carriers  walling  to  fly  for  less.  And  it  has  frustrated  charter  operations 
willing  to  lay  on  "barebone"  service  at  a  fraction  of  the  going  rates. 

It  is  argued  that  these  limitations  are  necessary  to  prevent  so- 
called  undue  diversion  from  the  scheduled  carriers.  We  can  recognize 
that  argument  for  what  it  is.  "Diversion"  would  not  occur  if  people 
thought  frequent  flights  and  frills  were  worth  the  price. 

Do  not  misunderstand  me.  I  have  nothing  against  Cadillacs.  But 
I  question  the  equity  of  a  system  that  forbids  the  sale  of  Pintos.  And 
I  also  wonder  about  a  system  which  permits  producers  of  a  "big 
ticket"  item  like  air  transportation  to  avoid  the  issue  of  price  except 
when  it  is  to  tell  the  consumer  that  a  special  rate  awaits  him  if  he  is 
leaving  on  a  Wednesday  morning,  i)lans  to  remain  at  his  destination 
for  precisely  53  days,  is  carr\'ing  no  luggage,  and  is  a  charter  member 
of  the  Flat  Earth  Society. 

COST    OF   REGULATION 

It  may  be  impossible  to  get  a  precise  measure  of  how  much  our  system 
of  regulation  actually  costs  the  airline  customer  and  the  American 
public.  But  we  can  get  a  rough  idea  from  examining  prices  in  those  few 
markets  where  regulated  carriers  face  competition  from  intrastate 
carriers  not  subject  to  Federal  regulation.  Tavo  such  markets  currently 
exist  in  California  and  Texas,  as  the  acting  Secretary  indicated,  and 
you  have  doubtless  already  heard  and  read  much  about  them.  Suffice  it 
to  say  that  the  unregulated  intrastate  carrier  entered  the  market  with 
substantially  lower  fares  in  each  instance.  In  the  case  of  Texas,  the 
price  differential  remains  today  with  the  result  that  consumers  are 
offered  a  lower  cost  alternative — offered  it,  I  might  add,  by  a  financi- 
ally successful  airline.  Southwest  Airlines.  In  the  case  of  "California, 
the  low-cost  competition  offered  by  Pacific  Southwest  Airlines  forced 
the  interstate  carriers  to  appeal  for  and  finally  to  get  from  the  Govern- 
ment permission  to  lower  their  rates  to  the  level  of  the  competition. 
But  you  need  only  step  across  the  State  line  to  appreciate  the  local 
character  of  this  consumer  benefit.  It  still  costs  much  more  to  fly  the 
226  miles  from  Los  Angeles  to  Las  Vegas  than  it  does  to  fly  the  347 
miles  from  Los  Angeles  to  San  Francisco. 


26 

The  cost  to  the  consumer  of  continued  regulation  is  suggested  also 
by  a  1972  economic  study  in  which  the  costs  of  airline  operations  were 
compared  with  fares  for  flights  between  30  different  pairs  of  cities. 
These  comparisons  showed  that,  in  markets  where  there  was  no  com- 
petition from  an  unregulated  carrier,  fares  exceeded  costs,  costs  being 
defined  to  include  a  7.5  percent  return  on  investment,  from  47  percent 
to  8-4  percent.  Since,  with  competition,  fares  could  be  expected  roughly 
to  parallel  costs,  this  wide  variation  would  seem  to  suggest  that 
the  experiences  in  Texas  and  California  do  not  reflect  unique 
circumstances. 

These  then  are  at  least  some  of  the  costs  that  have  been  imposed  on 
the  public  in  stressing  stability  and  comprehensive  service.  Whether 
one  has  been  worth  the  other  is  a  policy  question  which  Congress 
should  consider. 

But  any  weighing  of  costs  and  benefits  surely  should  be  preceded  by 
a  close  examination  of  their  relationship.  For  it  can  be  argued  that 
many  of  the  costs  incurred  were  not  necessary  to  the  attainment  of  the 
benefits  intended. 

SMALL    TOW^N    SERVICE     (CROSS-SUBSIDY) 

Consider  first  the  benefit  of  comprehensive  service — that  is,  service 
to  parts  of  the  country  where  traffic  is  too  light  to  support  a  scheduled 
airline.  It  is  often  argued  that  high  fares  on  heavily  traveled  routes 
are  needed  to  subsidize  losses  on  sparser  runs  which  the  regulated 
carriers  are  required  to  fly.  I  frankly  have  to  tell  you  I  do  not  know 
how  much  of  this  "cross-subsidization''  actually  occurs,  but  assuming 
that  there  is  some,  it  has  the  effect  of  putting  tlie  entire  industry  on  a 
de  facto  cost-plus  system  of  return,  a  system  which  experience  has  in- 
dicated is  a  very  poor  check  on  inefficiency.  Also,  requiring  one  air 
passenger  to  subsidize  the  flight  of  another  raises  a  serious  question  of 
equity.  If  it  is  a  desirable  thing  to  have  air  service  between  two  small 
towns,  why  should  only  one  class  of  citizens  be  asked  to  bear  the  cost 
of  it? 

Finallv.  the  svstem  raises  the  question  of  resource  allorntion.  for 
there  can  be  no  question  that  a  subsidy  paid  from  high  fares  on  heavily 
traveled  routes  causes  misallocation  of  resources. 

Higher  fares  on  denser  routes  inhibit  travel  on  those  routes.  The 
"right"  amount  of  air  travel  on  those  routes  would  be  the  amount 
which  people  would  buy  at  a  price  which  just  covered  all  costs  of  pro- 
viding the  service.  Higher  prices  will  cause  them  to  buy  less  than  that 
amount.  And  the  resulting  loss  to  society  is  the  same  as  it  would  be 
had  the  higher  price  been  the  result  of  private  price  fixing  or 
monopoly. 

I  express  no  view  on  the  question  of  whether  some  flights  should  be 
directly  subsidized.  I  suggest  simply  that  if  we  are  to  have  a  system 
under  which  some  people  subsidize  service  to  others,  we  should,  at  the 
very  least,  be  able  to  identify  its  costs  so  that  we  can  intelligently 
examine  alternate  forms  of  subsidy  and  so  that  we  can  periodically 
reassure  ourselves  that  the  benefits  are  worth  the  costs. 

DESTRUCTIVE    COMPETITION 

The  other  pillar— in  addition  to  comprehensive  service — on  which 
our  current  regulatory  system  stands  is  the  need  to  prevent  "cut- 


27 

throat'"  competition  which  could  threaten  the  industry's  stability  and 
perhaps  result  in  a  single-firm  monopoly. 

This  has  not  happened  in  California,  and  I  see  no  reason  to  expect 
that  it  would  be  a  general  problem. 

The  number  of  firms  present  in  any  industry  depends  largely  on 
whether  there  are  large  economies  of  scale  relative  to  market  demand. 
If  there  are,  there  will  be  only  a  few  firms  in  the  industry.  In  the 
most  extreme  cases,  there  may  be  only  one. 

But  the  airline  industry  does  not  have  large  economies  of  scale. 
The  basic  unit  of  production  is  the  airplane  itself.  Economic  studies 
indicate  that  an  efficient  airline  can  be  run  with  only  a  few  of  them. 
They  can  be — and  are — easily  shifted  from  one  route  or  one  carrier  to 
another. 

Single  firm  service  may  emerge  on  some  lightly  traveled  routes  be- 
cause of  the  small  size  of  the  market.  But  it  is  doubtful  that  such  firms 
could  charge  monopoly  prices  because  of  the  constant  threat  of  entry 
by  other  firms,  if  it  were  permitted.  The  ability  to  shift  planes  easily 
from  one  market  to  another  makes  the  threat  of  entry  quite  credible 
in  this  industr^\ 

Much  of  what  I  have  just  said  you  have  doubtless  heard  from 
others.  The  question  is,  "what  do  we  do  about  it  ?" 

CAB  asks  airlines  for  data  on  their  liquor  costs.  I  know  what  they 
are  doing. 

That  is  one  of  the  purposes  of  these  hearings,  and  because  the 
answer  to  the  question  of  what  we  can  do  about  it  is  really  not  all  that 
clear,  perhaps,  but  there  are  two  points,  Mr.  Chairman,  which  are 
quite  clear  to  me. 

First,  I  believe  that  no  one  is  going  to  be  able  to  provide  a  complete 
answer  until  we  have  a  better  accounting  of  the  costs  and  benefits  of 
the  current  system.  At  present,  neither  the  Federal  Trade  Commis- 
sion, nor  the  Congress  nor  the  American  public  has  any  idea  of  what 
the  current  system  of  regulation  costs  or  what  it  produces.  My  interest 
in  this  question  as  a  Federal  official  is  not  as  important  as  my  interest 
as  an  air  traveler — incidentally,  with  three  young  sons — and  as  a  tax- 
payer since  I,  along  with  millions  and  millions  of  other  Americans, 
am  paying  the  bills. 

COST    OF    REGULATIOX 

Senator  Kennedy.  You  cannot  really  tell  how  much  they  would 
save  the  consumer  ? 

INIr.  ExGMAX.  The  precise  number  is  one  which  is  beyond  our  ability 
to  knoAv.  As  you.  ]Mr.  Chairman,  cited  a  study  which  I  have  cited  iii 
the  past,  the  question  of  $17-$18  billion  range,  that  has  been  cited 
across  the  board,  that  of  course  includes  surface  transportation,  too, 
studies  indicating  the  range  from  48-84  percent  overcharging  on  the 
30  selected  flights  indicated  there,  and  certainly  we  are  talking  about 
hundreds  of  thousands  and  probably  millions  of  dollars  each  year. 

I  think  in  terms  of  specifics  as  to  some  of  these  cost  questions,  such 
as  to  whether  or  not  how  much  do  we  really  know,  how  much  cross 
subsidies  do  we  really  have  going  on,  or  is  this  a  kind  of  issue  that 
has  just  been  raised  to  tend  to  confuse  the  issue  would  be  helpful,  and 
we  have  to  work  to  continue  to  improve  the  information  we  have 
available  to  us. 


28 

Senator  Kennedy.  Do  you  have  the  ability  or  does  the  Federal 
Trade  Commission  have  that  kind  of  ability,  to  develop  figures  on 
this? 

Mr.  Engman.  We  have  a  large  staff  of  economists,  Mr.  Chairman, 
who  are  kept  busy  by  a  number  of  investigations  and  studies  which 
the  Congress  asks  us  to  undertake,  primarily  in  the  antitrust  enforce- 
ment area.  We  do  not  have  immediate  access  to  some  of  the  data  that 
the  Civil  Aeronautics  Board  does.  But  to  the  extent  Congress,  in  terms 
of  providing  us  with  resources  and  money,  are  interested  in  us  pro- 
ceeding with  the  further  investigation  so  some  of  these  economic  ele- 
ments, speaking  for  myself,  and  I  am  sure  on  behalf  of  the  Commis- 
sion, would  be  more  than  happy  to  comply. 

That  is  the  first  point  and  the  data  point. 

Second,  in  terms  of  what  I  am  clear  about  in  answering  this  ques- 
tion of  what  we  should  do.  my  experience  has  led  me  to  conclude  that 
the  free  enterprise  system  is  the  best  regulator  of  all.  I  can  see  nothing 
about  the  airline  industry  which  would  suggest  to  me  that  in  1975, 
Government  regulation  of  the  airline  industry  is  providing  the  con- 
sumer with  more  for  his  money  than  the  free  market  would  provide. 
Therefore,  I  suggest  you  listen  to  proponents  of  regulation  with  an 
open  mind,  as  I  have  done.  But  I  submit,  giveii  the  conditions  that 
exist  today  in  the  industry  and  in  regulated  industries  in  general, 
that  the  competitive  market  should  be  made  the  point  of  departure 
for  the  debate  and  that  the  burden  of  proof  should  rest  with  those 
who  argue  against  competition  rather  than  those  who  would  return 
to  it.  The  burden  should  also  be  on  those  who,  in  the  name  of  reform, 
stop  short  of  this  goal. 

There  will  be  doomsayers  who  will  forecast  the  direct  consequences 
of  deregulating  rates  and  entry.  Typically,  they  will  be  based  on  the 
reductio  ad  absurbum  case  in  which  at  12 :47  on  a  Wednesday  after- 
noon, we  shift  from  total  regulation  to  open  competition.  It  need  not 
occur  that  way.  If  the  Congress  were  to  determine  that  a  move  in  the 
direction  of  the  free  market  were  warranted,  it  could  easily  enough  be 
accomplished  in  stages.  There  is  ample  precedent.  Several  years  ago 
the  SEC  was  looking  at  an  analogous  situation  in  the  securities  in- 
dustry. Brokers  then  operating  on  a  fixed  rate  basis  argued  bitterly 
that  negotiated  rates  would  be  a  disaster.  The  SEC  rejected  that  argu- 
ment and  decided  to  move  ahead,  not  all  at  once,  but  on  a  staged  basis. 
Beginning  with  purchases  of  over  $500,000,  rates  were  left  to  the 
forces  of  the  market. 

SAFETY   AND    COMPETITION 

Senator  Kennedy.  But  you  did  not  really  have  the  issue  of  life, 
sustaining  your  industry.  If  you  made  a  mistake  in  tliat,  it  was  just  a 
matter  of  brokers'  fee.  Here  in  terms  of  safety  it  is  people's  lives. 

Mr.  Engman.  We  are  not  talking  about  safety.  I  am  talking  about 
the  Civil  Aeronautics  Board.  The  requirements  for  safety  are  handled 
by  the  Federal  Aviation  Administration.  If  I  agree  with  what  I  have 
read  in  the  papers,  perhaps  there  ought  to  be  some  tightening  up  of 
regulation  over  there,  wliich  is  under  the  jurisdiction  of  the  Depart- 
ment of  Transportation.  But  that  kind  of  safety  regulation  which  we 
are  all  in  favor  of,  the  traveling  public,  does  not  come  under  the 
jurisdiction  of  the  Civil  Aeronautics  Board. 


29 


THE    POSSIBILITY    OF    CHAOS 


Senator  Kennedy.  With  the  newer,  costly  equipment  and  the  addi- 
tional energy  costs,  in  considering  open  entry  and  competition  in  fares, 
are  we  not  talking  about  a  situation  which  is  inviting  chaos? 

Mr.  Engman.  i  am  not  at  all  sure  that  would  be  the  situation,  Mr. 
Chairman.  We  do  not  really  know  what  would  happen,  perhaps. 

I  suggest  part  of  the  problem  in  the  existing  market  is  that  some 
carriers — for  example,  Pan  Am  is  not  permitted  to  compete  in  some 
of  the  more  lucrative  routes.  I  was  happy  to  see  that  the  Department 
of  Justice  recently  suggested  to  CAB  that  that  might  be  one  of  the 
answers  to  Pan  Am's  problem. 

But  as  my  earlier  testimony  suggested,  the  present  system,  which 
prohibits  price  competition,  in  fact  encourages  the  type  of  situation 
to  exist  with  overcapacity,  and  that  leads  to  costs  higher  than  they 
otherwise  would  be,  and  bad  profit. 

Obviously  there  may  be  some  differences,  but  even  in  the  securities 
industry  back  a  few  years  ago,  we  had  a  bear  market,  falling  volume 
on  the  stock  exchange,  but  there  were  really  no  disasters  that  came 
about  as  a  result  of  the  abolition  of  the  fixed-rate  fee  system.  It  was 
done  in  a  series  of  stages  until  finally  the  system  was  abolished  alto- 
gether. It  is  not  a  pure  analog}',  but  it  seems  to  me  a  similar  approach 
might  be  taken  toward  the  airlines. 

I  suggest  a  scheduled  return  to  the  free  market  over  2  years  or  4 
years  or  whatever  period  Congress  deems  appropriate.  This  would 
put  the  fundamental  arguments  in  support  of  regulation  on  trial. 
And  it  could  be  done  in  a  manner  that  would  allow  the  decision  as  to 
how  far  to  go  to  be  based  on  fact  and  proven  results  rather  than  on 
theory. 

My  own  guess  is  that  we  would  make  it  all  the  way  back  to  "regula- 
tion" by  the  free  market  and  that  we  would  be  better  off  for  it. 

Thank  you  very  much,  Mr.  Chairman,  I  will  be  more  than  happy  to 
attempt  to  respond  to  any  questions  that  you  might  have. 

Senator  Kennedy.  Thank  you  very  much. 

I  value  very  highly  your  testimony  and  your  comments. 

We  in  the  Congress  have  been  very  impressed  with  the  efforts  that 
you  have  made  in  the  Federal  Trade  Commission  in  attempting  to 
bring  about  a  variety  of  reforms.  I  think  you  are  aware  that  a  few 
years  ago  wo  had  some  hearings  on  various  procedures  and  practices 
within  the  Federal  Trade  Commission  and  made  a  number  of  recom- 
mendations. I  must  say  that  I  have  been  enormously  impressed  with 
what  has  been  achieved  under  your-  leadership  in  the  Commission. 

jNIr.  Engman.  Thank  you. 

Senator  Kennedy.  I  think  that  has  been  of  great  value  to  the 
American  public. 

NEED    FOR    LEGISLATION 

I  am  wondering  whether  you  think  a  number  of  these  points  that 
you  have  raised  here  can  be  done,  a  number  of  these  reforms  can  be 
achieved  without  additional  legislation.  You  have  seen  very  sub- 
stantial reform  within  your  own  agencies  without  corresponding 
legislation,  I  believe,  and  I  am  just  wondering  whether  you  feel  these 
other  points  that  you  have  raised  here  this  morning  can"  be  done  like- 
wise without  legislation  ? 


30 

Mr.  Engman.  It  is  a  good  point,  Mr.  Chairman. 

Let  me  say  first  of  all  that  I  think  honesty  would  compel  me  to  say 
that  although  a  great  deal  of  the  impetus  at  the  Federal  Trade  Com- 
mission could  come  from  the  Commission,  I  think  a  number  of  things 
we  have  been  able  to  accomplish,  in  my  view  the  past  few  years,  have 
been  the  result  of  the  cooperation  and  assistance  of  the  Congress,  not 
only  in  terms  of  holding  hearings  on  certain  questions,  and  particu- 
larly recently  again  in  terms  of  assisting  us  with  some  kind  of  addi- 
tional legislative  authority.  But  I  do  appreciate  your  remarks. 

I  think,  as  Secretary  Barnum  indicated,  there  is  quite  a  bit  that 
could  be  done  under  the  existing  legislation.  Certainly  a  different 
approach,  a  more  liberalized  approach  could  be  taken  by  the  Board 
with  respect  to  limitations  on  entry.  I  certainly  feel  that  under  section 
1002  of  their  act  they  have  the  ability  to  not  suspend  proposed  fare 
decreases  by  various  airlines,  and  that  would  be  a  step  in  the  right 
direction,  they  could  encourage  price  competition,  price  quality 
option,  and  although  I  am  not  an  aviation  regulatory  expect,  I  believe 
that  thev  could  give  serious  consideration  on  their  own  to  adopting 
the  kind  of  proposal  which  Mr.  Barnum  outlined  this  morning  with 
respect  to  establishing  a  zone  of  reasonableness  Avith  respect  to  pricing. 

I  do  suggest  there  are  some  inbred  difficulties  within  any  institution 
after  a  period  of  time,  and  because  of  the  value  of  precedent  and 
because  the  agency  was  initially  established  in  effect  to  promote— and 
it  still  views  as  one  of  its  functions—  the  airline  industry  in  the  Ignited 
States. 

With  that  kind  of  objective  and  that  kind  of  of  gloss  written  over 
their  responsibilities,  let  me  say,  I  am  not  optimistic  that  substantial 
changes  will  be  made  or  sufficient  changes  will  be  made  by  the  Board. 

APPOINTMENT    OF    CAB    MEMBERS 

Senator  Kennedy.  Do  you  think  some  of  the  problem  is  the  appoint- 
ment process  ?  We  talked  a  little  bit  about  that  earlier. 

Mr.  Engman.  I  heard  the  discussion  on  that. 

Senator  Kennedy.  How  would  you  change  that  ? 

Mr.  Engman.  Let  me  first  confess  that  my  focus  on  it  with  respect 
to  this  system  of  regulation  basically  has  been  an  institutional  one  and 
I  have  not  given  a  great  deal  of  thought  to  the  earlier  questions,  and  1 
cannot  really  speak  from  firsthand  knowledge  as  to  Avhat  that  process 
has  been  with  respect  to  that  agency. 

I  know  as  far  as  my  own  process  went  that  the  Commerce  Committee 
I  thought  did  a  good,  extensive,  thorough  job  of  analysing  qualifica- 
tions in  the  examinations  I  have  seen  them  undertake,  and  I  think  it  is 
the  responsibility  of  Congress  to  do  that.  Whether  or  not  that  has  been 
done  sufficiently  with  respect  to  some  of  the  areas,  I  frankly  do  not 
know.  But  I  think  there  is  a  role  for  improvement  of  the  process.  I 
happen  to  believe  there  is  nothing  we  have  around  that  is  so  sacred 
(hat  we  cannot  improve  it  unless  it  is  something  like  the  first  amend- 
ment. As  a  result  of  that,  I  think,  there  may  be  an  admirable  approach 
there. 

Senator  Kennedy.  Fine.  Very  helpful.  We  want  to  thank  you  very 
much  for  your  presentation. 

Mr.  Engman.  Thank  you  very  much,  Mr.  Chairman,  for  the  oppor- 
tunity to  be  here. 


31 

Prepared  Statement  of  Lewis  A.  Engman 

Last  year  when  I  was  asked  to  present  the  Federal  Trade  Commission's  views 
on  governmental  restraints  in  the  marketplace,  I  expressed  concern  that,  like  so 
many  voguish  topics,  it  would  be  the  subject  of  much  discussion  but  little  action. 
It  is  gratifying,  therefore,  to  know  that  concern  with  this  vital  subject  has  con- 
tinued into  the  94th  Congress,  and  I  commend  this  subcommittee  for  its  role  in 
continuing  the  inquiry. 

At  a  time  when  rising  prices  threaten  the  welfare  of  every  American,  it  would 
be  folly  indeed  if  we  were  to  fail  to  address  this  one  area  where  such  large 
efficiencies  appear  to  be  available  to  us  without  offsetting  economic  costs. 

I  am,  therefore,  pleased  to  be  here,  Mr.  Chairman,  and  to  have  this  oppor- 
tunity to  offer  my  views  on  Federal  regulations  affecting  the  airline  industry. 

Lest  someone  else  feel  compelled  to  say  it  for  me,  I  must  state  at  the  outset 
that  I  am  no  expert  on  the  technical  aspects  of  the  airline  industry.  I  suggest, 
however,  that  one  need  be  no  expert  to  perceive  that  something  is  amiss  with  the 
way  the  Government  currently  construes  its  responsibility  toward  the  American 
consumer  of  air  transportation. 

As  spokesman  for  an  agency  broadly  charged  with  ensuring  that  the  consumer 
receives  the  best  that  the  marketplace  can  provide  for  him,  I  find  this  situation 
disturbing. 

The  Federal  Trade  Commission  is  committed  to  the  principle  that  people  are 
best  served  by  the  effective  operation  of  a  free  and  competitive  open  market. 

Today,  those  conditions  are  conspicuously  absent  in  our  airline  industry.  They 
are  absent  because,  over  35  years  ago,  the  Congress,  after  examining  the  needs 
of  a  then  infant  industry  struggling  to  raise  capital,  decided  that  the  public  wel- 
fare demanded  an  exception  to  the  principle  of  competition — demanded  that  the 
airline  industry  be  given  partial  immunity  from  the  antitrust  laws  and  from  the 
rigors  of  price  competition.  The  arguments  mustered  in  support  of  that  decision 
were  essentially  two :  that  it  was  necessary  to  ensure  the  industry  against  "cut- 
throat" competition  and  that  it  was  necessary  to  provide  service  to  localities 
which  would  not  otherwise  receive  it. 

I  was  not  around  at  that  time.  I  did  not  hear  the  arguments  made  for  and 
against  what  was  done.  But  whatever  arguments  were  made  at  that  time  and 
whatever  industry  conditions  they  reflected  should  be  of  little  consequence  to  us 
today.  For  the  relevant  question  now  is  where  has  it  all  brought  us? 

There  can  be  little  doubt  that  much  of  what  was  intended  has  been  achieved. 
Whether  it  is  because  of,  or  in  spite  of,  regulation,  I  do  not  know,  but  today  we 
have  beyond  question  the  most  comprehensive  air  transportation  network  in  the 
world.  Moreover,  despite  the  current  depleted  condition  of  several  of  our  major 
carriers,  the  industry  over  the  years  has  been  characterized  by  extraordinary 
stability. 

But  these  objectives  have  been  achieved  at  a  very  high  cost.  Our  system,  which 
severely  inhibits  price  competition  and  restricts  entry,  has  led  to  a  fare  structure 
on  many  routes  which  economists  agree  is  far  higher  than  that  which  would 
prevail  if  the  industry  were  characterized  by  price  competition  and  free  entry. 
Several  conditions  flow  from  this  fact. 

The  absence  of  any  real  price  competition  coupled  with  higher  than  competitive 
rates  leads  to  large  amounts  of  nonprice  competition.  One  important  type  of 
nonprice  competition  is  in  terms  of  frequency  of  flights.  This  in  turn  leads  to 
large  amounts  of  excess  capacity.  It  is  UQt  unusual  today  for  several  planes  to  fly 
almost  identical  schedules  each  with  a  small  fraction  of  its  seats  filled  on  some 
flights.  In  short,  there  is  economic  waste — the  classic  cost-plus  syndrome.  The 
air  passenger  who  finds  himself  next  to  an  empty  seat  may  be  pleased  with 
this  state  of  affairs.  He  is  able  to  spread  out  a  little.  But  I  wonder  how  pleased 
he  would  be  if  he  were  f^ware  that  he  had  paid  not  only  for  the  seat  he  was 
sitting  in,  but  for  the  seat  his  briefcase  was  sitting  in,  too. 

In  addition,  fixed  rates  have  created  a  sort  of  phony  war,  a  war  in  which 
airlines  compete  for  business,  not  on  the  basis  of  price,  but  on  the  basis  of 
scheduling  and  comfort.  All  of  us  today  have  standing  invitations  to  fly  Cheryl 
or  Karen  or  Trixie  or  even  Bruce.  Those  invitations  are  no  more  or  less  than  con- 
fessions on  the  part  of  the  airlines  that  our  decision  as  to  which  to  fly  pretty 
much  boils  down  to  whether  Cheryl  is  more  attractive  than  Bruce. 

This  bogus  competition  along  with  creature  comforts  and  the  pressure  to  up 
the  number  of  flights  can  be  explained  by  the  simply  economics  of  the  airline 
industry.  We  start  with  an  increase  in  fares.  In  the  absence  of  price  competition 
each  airline  tends  to  compete  away  the  "profits"  from  the  fare  increase  by 
engaging  in  various  forms  of  increased  nonprice  competition. 


32 

More  frills  are  added.  Witness  the  great  free  drink  battles  of  recent  times 
or  the  lounge  wars  of  some  time  back.  Often  flight  frequencies  are  also  in- 
creased. Unfortunately,  this  tends  to  reduce  overall  load  factors  on  all  the 
planes.  Rates  of  return  go  down,  and  soon  a  new  fare  increase  is  "required"  to 
maintain  the  existing  rates  of  return.  The  whole  non-productive  cycle  starts 
all  over  again. 

The  situation  is  analogous  to  that  which  existed  in  the  securities  industry 
a  few  years  ago  when  it  was  operating  on  fixed  rates  across  the  board.  Since 
brokerage  houses  could  not  offer  the  customer  lower  rates,  they  offered  frills, 
counseling  services  and  the  like.  The  brokerage  houses  argued  that  these  frills 
were  worth  the  extra  money,  but  the  institutional  investors  knew  better  and 
they  made  the  brokers  give  them  the  equivalent  of  rebates  under  the  table.  The 
American  consumer  of  air  transportation  doesn't  have  that  power.  I  wonder  how 
he  would  act  if  he  did. 

Comfort  and  scheduling  are  undoubtedly  worth  something  to  consumers.  But 
are  they  worth  the  price  he  must  pay  for  them?  Obviously,  they  are  worth 
nothing  to  those  who  cannot  afford  to  fly  because  of  the  high  prices.  There  is 
evidence  which  suggests  also  that  they  are  not  worth  it  even  to  those  who  can 
and  do  fly.  If,  given  the  choice,  some  people  would  choose  to  pay  the  higher  rates 
for  deluxe  or  frequent  service,  why  does  the  industry  and  the  Government  shy 
away  from  giving  them  that  choice?  For  surely  that  has  been  the  pattern  in 
recent  years. 

Our  current  system  of  regulation  has  prevented  the  entry  of  new  carriers 
willing  to  fly  for  less.  And  it  has  frustrated  operations  willing  to  lay  on  "bare- 
bones"  service  at  a  fraction  of  the  going  rates. 

It  is  argued  that  these  limitations  are  necessary  to  prevent  "undue  diversion" 
from  the  scheduled  carriers.  We  can  recognize  that  argument  for  what  it  is. 
"Diversion"  would  not  occur  if  people  thought  frequent  flights  and  frills  were 
worth  the  price. 

Do  not  misunderstand  me.  I  have  nothing  against  Cadillacs.  But  I  question  the 
equity  of  a  system  that  forbids  the  sale  of  Pintos.  And  I  wonder  about  a  system 
which  permits  producers  of  a  "big  ticket"  item  like  air  transportation  to  avoid 
the  issue  of  price  except  when  it  is  to  tell  consumer  that  a  si>ecial  rate  awaits 
him  if  he  is  leaving  on  Wednesday  morning,  plans  to  remain  at  his  destination 
for  precisely  53  days,  is  carrying  no  luggage  and  is  a  charter  member  of  the  Flat 
Earth  Society. 

It  may  be  impossible  to  get  a  precise  measure  of  how  much  our  system  of 
regulation  actually  costs  the  airline  customer  and  the  American  public.  But  we 
get  a  rough  idea  examining  prices  in  those  few  markets  where  regulated  carriers 
face  competition  from  intrastate  carrers  not  subject  to  Federal  regulation.  Two 
such  markets  currently  exist  in  California  and  Texas,  and  you  have  doubtless 
already  heard  and  read  much  about  them.  SuflBce  it  to  say  that  the  unregulated 
intrastate  carrier  entered  the  market  with  substantially  lower  fares  in  each 
instance.  In  the  ca.se  of  Texas,  the  price  differential  remains  today  with  the  result 
that  consumers  are  offered  a  lower  cost  alternative — offered  it,  I  might  add,  by  a 
financially  successful  airline,  Southwest  Airlines.  In  the  case  of  California,  the 
low  cost  competition  offered  by  Pacific  Southwest  Airlines  forced  the  interstate 
carriers  to  appeal  for  and  to  get  from  the  government  permission  to  lower  their 
rates  to  the  level  of  the  competition.  But  you  need  only  step  across  the  state  line 
to  appreciate  the  local  character  of  this  consumer  benefit.  It  still  costs  much 
more  to  fly  the  226  miles  from  Los  Angeles  to  Las  Vegas  than  it  does  to  fly  the 
347  miles  from  Los  Angeles  to  San  Francisco. 

The  cost  of  the  consumer  of  continued  regulation  is  suggested  also  by  a  1972 
economic  study  in  which  the  costs  of  airline  operations  were  compared  with 
fares  for  flights  between  30  different  pairs  of  cities.  These  comparisons  showed 
that,  in  markets  where  there  was  no  competition  from  an  unregulated  carrier, 
fares  exceeded  costs,  including  a  7%  percent  return  on  investment,  by  from  47 
percent  to  84  percent.  Since,  with  competition,  fares  could  be  expected  roughly  to 
parallel  costs,  this  wide  variation  would  seem  to  suggest  that  the  experiences  in 
Texas  and  California  do  not  reflect  unique  circumstances. 

These  then  are  at  least  some  of  the  costs  that  have  been  imposed  on  the  public 
in  stressing  stability  and  comprehensive  service.  Whether  one  has  been  worth 
the  other  is  a  policy  question  which  Congress  should  consider. 

But  any  weighing  of  costs  and  benefits  surely  should  be  preceded  by  a  close 
examination  of  their  relationship.  For  it  can  be  arsrued  that  many  of  the  costs 
incurred  were  not  necessary  to  the  attainment  of  the  benefits  intended. 


Consider  first  the  benefit  of  comprehensive  service,  that  is,  service  to  parts 
of  the  country  where  traffic  is  too  light  to  support  a  scheduled  airline.  It  is  often 
argued  that  high  fares  on  heavily  travelled  routes  are  needed  to  subsidize  losses 
on  sparser  runs  which  the  regulated  carriers  are  required  to  fly.  I  do  not  know 
how  much  of  this  "cross-subsidization"  actually  occurs,  but  assuming  that  there  is 
some,  it  has  the  effect  of  putting  the  entire  industry  on  a  de  facto  cost-plus  system 
of  return,  a  system  which  experience  has  indicated  is  a  very  poor  check  on 
inefficiency.  Also,  requiring  one  air  passenger  to  subsidize  the  flight  of  another 
raises  a  serious  question  of  equity.  If  it  is  a  desirable  thing  to  have  air  service 
between  two  small  towns,  why  should  only  one  class  of  citizens  be  asked  to  bear 
the  cost  of  it? 

Finally,  the  system  raises  the  question  of  resource  allocation,  for  there  can 
be  no  question  that  a  subsidy  paid  from  high  fares  on  heavily  travelled  routes 
causes  misallocation  of  resources. 

Higher  fares  on  denser  routes  inhibit  travel  on  those  routes.  The  "right"  amount 
of  air  travel  on  these  routes  would  be  the  amount  which  i>eople  would  buy  at  a 
price  which  just  covered  all  costs  of  providing  the  service.  Higher  prices  will 
cause  them  to  buy  less  than  that  amount.  And  the  resulting  loss  to  society  is  the 
same  as  it  would  be  had  the  higher  price  been  the  result  of  private  price  fixing  or 
monopoly. 

I  express  no  view  on  the  question  of  whether  some  flights  should  be  directly 
subsidized.  I  .suggest  simply  that  if  we  are  to  have  a  system  under  which  some 
people  subsidize  service  to  others,  we  should,  at  the  very  least,  be  able  to  identify 
its  costs  so  that  we  can  intelligently  examine  alternate  forms  of  subsidy  and  so 
that  we  can  periodically  reassure  ourselves  that  the  benefits  are  worth  the  costs. 
The  otlier  pillar — in  addition  to  comprehensive  service — on  which  our  current 
regulatory  system  stands  is  the  need  to  prevent  "cutthroat"  competition  which 
could  threaten  the  industry's  stability  and  perhaps  result  in  a  single-firm 
monopoly. 

This  has  not  happened  in  California,  and  I  see  no  reason  to  expect  that  it  w^ould 
be  a  general  problem. 

The  number  of  firms  present  in  any  industry  depends  largely  on  whether  there 
are  large  economies  of  scale  relative  to  market  demand.  If  there  are,  there  will  be 
only  a  few  firms  in  the  industry.  In  the  most  extreme  cases,  there  may  be  only  one. 
But  the  airline  industry  does  not  have  large  economies  of  scale.  The  basic 
unit  of  production  is  the  airplane  itself.  Economic  studies  indicate  that  an  efficient 
airline  can  be  run  with  only  a  few  of  them.  They  can  be — and  are — easily 
shifted  from  one  route  or  carrier  to  another. 

Single  firm  service  may  emerge  on  some  lightly  travelled  routes  because  of 
the  small  size  of  the  market.  But  it  is  doubtful  that  such  firms  could  charge 
monopoly  prices  because  of  the  constant  threat  of  entry  by  other  firms.  The  ability 
to  shift  planes  easily  from  one  market  to  another  makes  the  threat  of  entry  quite 
credible  in  this  industry.  Much  of  what  I  have  said  you  have  doubtless  heard  from 
others.  The  question  is  "what  do  we  do  about  it?"  This  is  obviously  a  complex 
area,  and  the  precise  answer  to  that  question  is  not  clear.  However,  two  points 
are  quite  clear  to  me. 

First,  I  believe  that  no  one  is  going  to  be  able  to  provide  a  complete  answer 
until  we  have  a  better  accounting  of  the  costs  and  benefits  of  the  current  system. 
At  present,  neither  the  Federal  Trade  Commission,  nor  the  Congress  nor  the 
American  public  has  any  idea  of  what  the  current  system  of  regulation  costs  or 
what  it  produces.  My  interest  in  this  question  as  a  Federal  official  is  not  as  im- 
portant as  my  interest  as  an  air  traveller  and  a  taxpayer  since  I,  along  with 
millions  and  millions  of  other  Americans,  am  paying  the  bills.  Congress'  need  to 
know  is  greatest  of  all.  For  without  the  facts  on  the  table,  you  will  have  no 
frame  of  reference  against  which  to  compare  alternate  approaches. 

Second,  my  experience  has  led  me  to  conclude  that  the  free  enterprise  system 
is  the  best  regulator  of  all.  I  can  see  nothing  about  the  airline  industry  which 
would  suggest  to  me  that  in  1975,  Government  regulation  of  the  airline  industry 
is  providing  the  consumer  with  more  for  his  money  than  the  free  market  would 
provide.  Therefore,  I  suggest  you  listen  to  proponents  of  regulation  with  an  open 
mind,  as  I  have  done.  But  I  submit,  given  the  conditions  that  exist  today  in  the 
industry  and  in  regulated  industries  in  general,  that  the  competitive  market 
should  be  made  the  point  of  departure  for  the  debate  and  that  the  burden  of 
proof  should  rest  with  those  who  argue  against  competition  rather  than  with 
those  who  would  return  to  it.  The  burden  should  also  be  on  those  who,  in  the 
name  of  reform,  stop  short  of  this  goal. 


51-14G   O  -  76  -  pt.  : 


34 

There  will  be  doomsayers  who  will  forecast  the  direct  consequences  of  de- 
regulating rates  and  entry.  Typically  they  will  be  based  on  the  reductio  ad 
absurdum  case  in  which  at  12  :47  on  a  Wednesday  afternoon  we  shift  from  total 
regulation  to  open  competition.  It  needn't  occur  that  way.  If  the  Congress  were 
to  determine  that  a  move  in  the  direction  of  the  free  market  were  warranted, 
it  could  easily  enough  be  accomplished  in  stages.  There  is  ample  precedent. 
Several  years  ago  the  SEC  was  looking  at  an  analogous  situation  in  the  securi- 
ties industry.  Brokers  then  operating  on  a  fixed  rate  basis  argued  bitterly  that 
negotiated  rates  would  be  a  disaster.  The  SEC  rejected  that  argument  and  de- 
cided to  move  ahead,  not  all  at  once,  but  on  a  staged  basis.  Beginning  with  pur- 
chases of  over  $500,000,  rates  were  left  to  the  forces  of  the  market.  Though  this 
occurred  against  the  background  of  a  bear  market  and  falling  volume,  there  were 
no  disasters.  So  the  cutoff  level  for  negotiated  rates  was  lowered,  not  just  once 
but  again  and  again  at  i>eriodic  intervals  until  the  fixed  rate  system  was  abolished 
altogether. 

It  may  not  be  a  perfect  analogy,  but  it  seems  to  me  that  a  similar  approach 
could  be  taken  toward  the  airlines.  I  suggest  a  scheduled  return  to  the  free 
market  over  2  years  or  4  years  or  whatever  period  Congress  deems  appropriate. 
This  would  put  the  fundamental  arguments  in  support  of  regulation  on  trial. 
And  it  could  be  done  in  a  manner  that  would  allow  the  decision  as  to  how  far  to 
go  to  be  based  on  fact  and  proven  results  rather  than  on  theory. 

My  own  guess  is  that  we  would  make  it  all  the  way  back  to  "regulation"  by 
the  free  market  and  that  we  would  all  be  better  off  for  it. 

Senator  Kennedy.  Our  next  witness  is  the  Assistant  Attorney  Gen- 
eral for  the  Antitrust  Division,  the  Department  of  Justice,  Mr.  Kauper. 
He  formerly  served  in  the  Office  of  Legal  Counsel.  He  was  a  law  pro- 
fessor at  the  University  of  Michigan.  We  welcome  him  here  this 
morning. 

A  great  deal  of  attention  has  been  f  ocussed  on  the  Antitrust  Division. 
I  am  sure  you  know  how  important  your  own  work  is.  I  want  you  to 
know  that  we  in  the  Congress  think  so,  too. 

You  have  very  extensive  testimony  here.  I  am  just  wondering  how 
you  want  to  proceed.  I  want  to  give  you  a  fair  chance  to  present  it. 

STATEMENT  OF  THOMAS  E.  KAUPER,  ASSISTANT  ATTORNEY 
GENERAL,  ANTITRUST  DIVISION,  DEPARTMENT  OF  JUSTICE,  AC- 
COMPANIED BY  DONALD  BAKER  AND  KEITH  CLEARWATERS, 
DEPUTY  ASSISTANT  ATTORNEYS  GENERAL 

Mr.  Kauper.  Mr.  Chairman,  at  your  staff's  request  I  have  been 
sitting  out  there  marking  out  portions  of  it. 

So,  I  think,  what  I  will  try  to  do  is  to  go  through  it,  but  omitting 
very  substantial  parts. 

Senator  Kennedy.  We  will  obviously  include  it  in  the  record. 

Mr.  Kauper.  I  am  accompanied  by  Deputy  Assistant  Attorney  Gen- 
eral Donald  Baker  on  my  right,  and  on  my  left  Deputy  Assistant  Attor- 
ney General  Keith  Clear  waters,  wlio  will  be  taking  part  in  these 
hearings. 

Mr.  Chairman,  I  am  happy  to  be  here  today  to  present  the  views  of 
the  Department  of  Justice  and  to  report  on  the  work  that  the  adminis- 
tration is  doing  on  economic  regulation  of  domestic  air  transportation. 

Airline  costs  affect  us  all  as  citizens,  taxpayers,  and  consumers.  They 
affect  us  when  we  buy  products,  when  we  carry  out  our  jobs,  and  when 
we  travel  for  pleasure.  Airline  costs  are  in  turn  directly  affected  by 
airline  regulation — for  it  is  regulation  which  tells  carriers  on  which 
routes  they  can  compete  and  what  means  of  competition  they  can  use. 
Basically,"  it  keeps  entry  tight,  while  allowing  carriers  to  compete  in 
terms  of  service  but  not  price.  The  result  is,  as  you  would  expect,  a  sys- 


36 

Icm  which  sets  both  price  and  service  at  levels  above  what  they  would 
be  in  a  competitive  market — in  other  Avords,  there  are  more  planes,  with 
more  empty  seats,  and  the  customer  pays  more  tlian  he  would  under  a 
regime  oi  open  competition. 

For  years  nobody  much  worried  about  CAB  price  and  enti-y  policies, 
because  we  were  in  a  continuing  trend  of  improving  equipment,  de- 
clining cost,  declining  prices,  and  rapidly  growing  traffic.  The  airline 
traveler's  Avorld  was  getting  better,  even  tliough  CAB  rate  and  entry 
regulation  was  probably  slowing  down  at  least  the  rate  at  which  fares 
declined,  and  encouraging  excess  capacity. 

Now,  ho\\'ever,  the  situation  has  changed.  Due  to  sharply  higher  fuel 
and  labor  costs,  airlines  have  been  requesting,  and  the  Board  has  ap- 
proved, a  A\hole  sei-ies  of  fare  increases,  which  have  come  at  a  time 
when  the  public  at  large  was,  if  anything,  less  able  to  pay  these  fai^es. 
At  the  same  time,  the  Board  has  actively  sought  to  cut  back  on  low- 
price  air  travel,  through  limitations  on  promotional  fares  and  restric- 
tions on  charter  activity.  The  result  of  all  this  has  been  to  raise  fares 
considerably  for  everyone  and  to  raise  them  enormously  for  certain 
classes  of  users.  The  overall  effect  has  been  to  produce  an  almost  un- 
precedented substantial  reduction  in  air  travel — more  empty  seats  on 
scheduled  flights  and  fewer  charter  flights.  The  i-eduction  in  demand 
has  tended  to  push  up  the  airlines'  miit  costs,  since  they  have  had  to 
spread  out  their  fixed  costs  over  fewer  passengers.  This  in  turn  hag 
provided  the  impetus  for  renewed  fare  increases,  a  situation  likely 
to  further  reduce  air  travel  and  hence  again  increase  unit  costs.  The 
resulting  spiral  of  increasing  fares  and  costs  means  that  the  smaller 
proportion  of  the  public  which  can  afford  to  fly  gets  reduced  service 
at  increased  prices. 

REGULATION    OF    FARES    AND    ROUTE    ENTRY 

We  in  the  administration  have  been  studying  for  some  time  how  to 
break  out  of  this  upward  spiral  of  prices  and  costs.  We  have  concluded 
that  the  most  hopeful  avenue  is  a  substantial  relaxation  of  existing 
price  and  entry  regulation,  which  forces  cairiers  to  offer  excessive 
amounts  of  unused  seats  at  excessively  high  fares.  That  system  of 
regulation  has  in  addition  prevented  innovative  newcomers  from 
coming  into  the  business  of  interstate  air  transportation,  in  the  interest 
of  protecting  the  established  carriers  against  new  competition.  We  be- 
lieve that  more  open  competitive  pricing,  if  given  a  chance,  would 
broaden  the  carriers'  entrepreneurial  opportunities  by  giving  them  a 
chance  to  compete  with  lower  fare?  as  well  as  Avith  extra  seats.  We  be- 
lieve that  it  would  tend  to  bring  interstate  air  transportation  more  into 
line  with  what  we  saw  in  California  and  Texas.  An  environment  of 
lower  fares  and  fuller  planes.  If  this  occurs— and  both  actual  experi- 
ence and  economic  theory  suggest  that  it  Avill — we  have  found  a  basis 
for  breaking  the  cycle  of  rising  costs  and  declining  service.  Lower 
prices  are  likely  to  come  quite  quickly  and  lower  prices  are  likely  to 
encourage  new  traffic  quite  quickly.  By  the  same  token,  liberalized 
entry  rules^an  environment  with  less  emphasis  on  route  protection — 
are  likely  to  get  onto  the  routes  those  carriers  who  are  most  efficient  at 
serving  them.  In  a  competitive  environment,  such  efficiencies  can  in 
turn  be  passed  on  to  the  traveler  in  the  form  of  lower  fares. 


36 

The  Department's  perspective  on  airline  regulatory  problems  is 
based  of  course  on  our  experience  in  enforcing  the  antitrust  laws  in  a 
great  variety  of  industries  having  a  diversity  of  cost  and  capital  char- 
acteristics, it  is  based  on  our  extensive  participation  before  the  CAB 
in  a  variety  of  proceedings.  And  it  is  based  on  our  experience  in  anti- 
trust enforcement  in  other  regulated  industries,  some  of  which  have 
economic  characteristics  similar  to  those  of  air  transportation.  Our 
experience  tells  us  that  regulated  firms  rarely  welcome  freer  entry  rules 
and  more  flexible  pricing.  They  generally  want  to  be  protected  from 
outsiders  and  protected  from  each  other  by  a  benevolent  regulator.  In 
the  airline  field,  regulated  firms  generally  have  opposed  pricing  flexi- 
bility and  offered  capacity  cartel  agreements  instead.  Yet  our  experi- 
ence also  tells  us  that  in  fact  competition  works  in  regulated  environ- 
ments much  more  efficiently  than  the  regulated  firms  generally  be- 
lieve; and  we  find  increasing  use  of  competition  in  place  of  direct 
regulation  as  a  tool  to  promote  efficiency  in  a  number  of  regulated  en- 
vironments—ranging from  wholesale  electric  power  to  securities 
markets. 

The  Department  is  currently  Avorking  with  the  Department  of 
Transportation,  the  Council  of  Economic  Advisers,  the  Council  on 
Wage  and  Price  Stability  and  the  Office  of  ^lanagement  and  Budget  to 
develop  detailed  administration  proposals  which  respond  to  this  reality 
in  the  transportation  sector.  We  hope  to  have  detailed  proposals  for 
air  transport  regulation  reform  for  presentation  to  the  Congress  in 
the  near  future.  At  this  point,  these  agencies  have  arrived  at  a  broad 
consensus  in  principle,  which  we  will  discuss  today. 

We  all  agree  that  regulation  of  rates  and  routes  has  been  excessive 
and  has  inflated  present  cost  and  fare  levels. 

We  believe  the  Government  should  regulate  the  airlines  where  neces- 
sary to  insure  the  safety  and  reliability  of  air  transportation — but  this 
clearly  does  not  require  direct  Government  regulation  of  airline  pricing 
and  entry  to  the  current  extent.  We  believe  the  focus  of  Government 
regulation  of  the  airlines  should  be  on  these  essentially  noneconomic 
goals,  with  clear  standards  and  ]5rocedures  which  insure  that  regula- 
tory powers  are  not  used  to  unnecessarily  limit  competition.  Even  if 
full  rate  regulation  is  deemed  necessary  to  deal  with  certain  problems — 
for  instance,  the  prevention  of  monopoly  pricing  in  certain  rnarkets — 
such  regulation  should  be  carefully  crafted  to  limit  and  clarify  goals, 
standards  and  procedures. 

Eeform  only  of  procedural — rather  than  substantive — provisions  of 
the  act  cannot  correct  the  fundamental  problem  of  its  ambiguous  and 
sometimes  conflicting  stated  objectives.  Procedural  reform  of  the  act 
might  well  be  desirable,  but  it  is  not  likely  to  be  successful  without 
a  narrowing  and  clarification  of  the  standards  the  Board  may  apply 
in  making  economic  decisions,  and  of  the  scope  of  airline  activities 
subject  to  those  decisions.  Such  a  redefinition  of  the  act's  economic 
goals  and  standards  would  be  a  substantial  improvement.  And  in  our 
view,  such  a  redefinition  Avould  call  into  question  the  continued  useful- 
ness of  much  of  present  economic  regulation. 

CAB    AUTHORITY    TO    GRANT    ANTITRUST    IMMUNITY 

The  administration  group  also  agrees  that  the  CAB  should  not  be 
given  broad  authority  to  immunize  from  the  antitrust  laws  all  the 


37 

private  ao:reements  and  mergers  it  approves.  Accordingly,  our  pro- 
posals will  provide  for  a  much  narrower  area  of  antitrust  exemption, 
and  for  a  merger  approval  approach  generally  modeled  on  the  Bank 
Merger  Act  of  1966. 

To  explain  the  basis  for  these  rather  broad  conclusions,  I  will  sketch 
briefly  the  circumstances  which  led  to  the  imposition  of  Federal  eco- 
nomic regulation  of  the  airlines,  describe  what  I  believe  to  be  the 
lessons  of  major  CAB  economic  regulatory  proceedings,  and  attempt 
to  outline  some  preliminary  conclusions. 

HISTORY    or     CAB    REGULATIOX 

Federal  regulation  of  air  transportation  has  developed  primarily 
along  two  paths :  one  set  of  statutes  which  regulate  safety,  airport  and 
airway  affairs,  and  another  specifically  directed  toward  the  regulation 
of  the  economics  of  air  transportation.  The  first  category  of  statutes 
has  been  the  responsibility  of  the  Department  of  Transportation  and 
the  National  Transporation  Safety  Board  for  several  years.  The  eco- 
nomic regulatory  system  which  the  Civil  Aeronautics  Board  adminis- 
ters is  now  embodied  by  the  Federal  Aviation  Act  of  1958,  as  amended. 

The  origins  of  airline  economic  regulation  are  usually  traced  to  the 
Civil  Aeronautics  Act  of  1938,  which  generally  followed  the  outline 
of  the  Interstate  Commerce  Act  in  setting  up  most  of  the  major  regula- 
tory features  of  today's  Federal  Aviation  Act.  Tliere  had  been  partial 
economic  regulation  of  air  carriers  prior  to  1938,  however.  After 
experimenting  with  several  different  means  of  administering  a  system 
of  subsidized  air  transport  of  mail,  the  Congress  determined  in  1930 
to  grant  the  Postmaster  General  broad  powers  over  the  routes,  rates, 
and  practices  of  carriers  carrying  airmail  under  contract  with  the 
Government.  In  1935,  the  Congress  broadened  this  regulation  to. pro- 
hibit carriers  with  airmail  contracts  from  engaging  in  any  service  on 
routes  other  than  their  airmail  routes  if  such  service  would  compete 
with  another  carrier  having  an  airmail  contract  on  that  route.  The 
predominance  of  mail  over  passenger  service  was  rapidly  diminishing 
throughout  this  period,  however,  and  by  1937  air  carrier  income  from 
passenger  service  was  twice  as  great  as  mail  income.  Unregulated  car- 
riers without  airmail  contracts  began  to  compete  with  airmail  carriers, 
who  naturally  complained  about  their  unregulated  competitors'  greater 
economic  freedom.  The  Interstate  Commerce  Commission,  which  ob- 
tained economic  regulatory  powers  over  motor  carriers  in  1935,  pressed 
for  the  extension  of  economic  regulation  over  all  air  carriers,  under  the 
general  theory  that  it  is  unfair  and  "chaotic"  foi'  unregulated  firms  to 
be  allowed  to  compete  with  regulated  firms. 

The  protection  of  a  subsidized  airmail  system  was  a  vital  objective 
of  the  drafters  of  the  1938  act.  Even  today,  a  very  high  percentage 
of  the  provisions  of  that  act,  as  amended,  still  are  concerned  with  the 
carriage  of  mail.  Today,  although  the  mail  system  is  of  crucial  im- 
portance, it  is  a  small  percentage  of  the  air  transportation  business. 
There  certainly  would  be  no  logical  basis  today  for  designing  the  entire 
air  transportation  system  around  the  mail  system,  because  the  needs 
of  the  Postal  Service  can  be  met  with  relatively  small  and  specific 
modifications  to  the  larger  air  system. 

Just  as  the  "chaotic"  conditions  generated  by  the  efforts  to  develop 
an  airmail  system  have  disappeared  today,  we  no  longer  experience 


38 

two  other  very  important  factors  which  led  to  the  creation  of  airline 
economic  regulation  in  1938.  The  Great  Depression  had  shaken  our 
society's  confidence  in  the  free  market  system,  and  led  to  a  number 
of  laws  which  substituted  direct  Government  economic  regulation  of 
business  organizations  for  the  maintenance  of  free  competition.  Also, 
air  transportation  in  the  1930's  was  thought  to  suffer  from  undue 
division  of  governmental  regulatory  authority  among  the  Commerce 
Department,  the  Post  Office  Department,  and  the  Interstate  Commerce 
Commission,  and  it  was  considered  a  very  important  function  of  the 
1938  act  to  combine  and  coordinate  all  of  these  functions  within  one 
agency. 

The  drafters  of  the  act,  however,  vehemently  denied  any  intention 
to  allow  the  Board  to  restrain  competition  or  create  monopolies.  The 
act  itself  directed  the  Board  to  maintain  "competition  to  the  extent 
necessary"  to  pursue  other  rather  inclusive  goals,  and  explicitly 
directed  the  Board  to  observe  conventional  antitrust  principles  in 
deciding  merger  and  interlocking  control  cases. 

The  act's  reliance  upon  competition  among  air  carriers  shows  that 
the  Congress  clearly  did  not  regard  air  transportation  operations  as 
having  "natural  monopoly"  characteristics  which  required  Govern- 
ment control  in  the  place  of  the  discipline  of  competition.  Instead 
of  detailed  control  of  the  rate  base,  regulation  was  extended  to  fares, 
entry  and  exit  from  specific  routes,  and  agreements  and  mergers. 

MERGERS REASONS    FOR 

The  first  category  of  major  CAB  economic  cases  are  those  in  which 
the  basic  structure  of  the  airline  industry  itself  was  at  issue.  In  the 
last  15  years,  the  Department  of  Justice  has  opposed  three  major 
trunk  air  carrier  merger  proposals,  which  had  they  been  approved, 
would  have  substantially  redrawn  the  route  map  of  the  U.S.  domestic 
system,  and  considerably  increased  the  already  very  great  concen- 
tration of  the  airline  industi^  in  the  hands  of  a  very  few  large  trunk 
air  carriers. 

Since  1962,  we  have  opposed  before  the  Board  the  proposed  mergers 
of  American  with  Eastern,  Western  with  American,  and  National 
with  Northwest. 

In  the  last  few  years,  the  Department  also  has  studied  several  other 
major  airline  merger  proposals  which  were  never  filed  and  litigated 
at  the  CAB.  .  . 

As  a  result  of  studying,  testing,  and  arguing  the  evidence  m  these 
cases,  we  have  come  to  the  conclusion  that  in  the  absence  of  economic 
regulation,  the  air  transportation  industry  probably  would  have  a 
reasonably  flexible,  competitive  structure  which  would  serve  the 
public  better  than  the  present  Government-controlled  structure.  Ex- 
perience under  economic  regulation,  and  in  unregulated  air  trans- 
portation where  available,  indicates  that  the  industry  tends  to  have 
a  "competitive"  structure,  rather  than  being  a  "natural  monopoly" 
which  must  be  regulated  in  the  interests  of  the  public. 

Evidence  is  quite  abundant  that  there  are  no  important  economies 
of  scale  in  air  transportation ;  that  is,  larger  firms  are  not  more  efficient 
or  less  costly  simply  because  of  their  size.  In  fact,  other  things  being 
equal,  the  largest  air  carriers  tend  to  have  a  higher  level  of  unit  costs, 


39 

and  there  are  some  indications  that  these  increased  costs  are  caused 
by  the  difficulties  of  managing  an  airline  of  very  large  size. 

The  airlines'  "right-of-way''  is  the  air  itself /and  their  "tracks,"  if 
any,  are  the  air  traffic  control  guideways  maintained  by  the  Federal 
Government.  Well  over  80  percent  of  the  airlines'  investment  is  in 
flight  equipment,  which  is  among  the  most  mobile  of  assets,  rather 
than  in  fixed  assets,  as  is  the  case  in  the  classical  "natural  monopoly." 
Not  only  does  this  make  competitive  service  economically  feasible,  but 
it  makes  duplication  of  routes  far  less  risky,  because  competitors  can 
more  easily  adjust  their  operations  by  rescheduling  an  aircraft  from 
one  city-pair  to  another — assuming  that  the  Government  does  not 
prevent  them  from  doing  so. 

In  view  of  this  conclusion,  why  have  so  many  mergers  been  pro- 
posed? Perhaps  the  most  important  reasons  for  mergers  among  the 
regulated  air  carriers  have  been  the  effects  of  regulation  itself.  Air 
carriers  know  that  when  they  hold  a  certificate,  it  is  the  nature  of 
economic  regulation  that  the  Board  will  to  a  greater  or  lesser  degree 
protect  them  from  entry  by  new  competitors  on  that  route.  Similarly, 
the  air  carriers  know  that  they  cannot  expand  onto  a  new  route  with- 
out obtaining  a  certificate.  Consequently,  any  certificated  air  carrier, 
no  matter  how  poorly  run  and  how  debilitated  financially  and  opera- 
tionally, has  one  very  valuable  asset — its  route  certificate.  This  asset 
typically  has  been  sold  by  merger  of  weak  carriers  into  stronger 
carriers.  As  a  result,  no  large  federally  certificated  air  carrier  has  gone 
out  of  business  other  than  through  merger  with  another  federally 
certificated  air  carrier.  Because  the  Board  has  allowed  virtually  no 
new  firms  to  join  the  ranks  of  the  certificated  air  carriers,  there  has 
been  a  steady  diminution  in  the  number  of  air  carriers  with  certificates 
from  the  Federal  Government. 

It  has  been  observed  that  during  the  period  when  California  intra- 
state airlines  were  essentially  free  from  economic  regulation,  many 
firms  entered  and  left  the  market,  but  none  of  them  left  tlie  market 
through  merger  One  very  careful  economic  study  of  this  phenomenon, 
and  the  contrast  between  unregulated  California  airlines  and  the  i-egu- 
lated  interstate  airlines  m^akes  a  convincing  and  apparently  unrebutted 
case  that  in  the  absence  of  economic  regulation  there  probably  would 
have  been  many  more  competing  airlines  in  the  United  States  than  the 
CAB  has  allowed  to  exist. 

As  long  as  new  certificates  are  not  freely  given,  one  would  expect 
that  there  would  be  some  transfer  of  certificates  as  carriers  seek  to 
reorganize  their  route  authorities.  However,  sale  or  trade  of  certificate 
authority  has  been  fairly  rare,  althouirh  not  unprecedented,  because 
until  lately  the  Civil  Aeronautics  Board  did  not  encourage  such 
"trafficking  in  certificates."  Eecently,  the  Board's  willingness  to  con- 
sider transfer  of  certificate  authority  has  led  to  a  number  of  "route 
swap"'  proposals.  Generally  speaking,  route  transfers — including  the 
reciprocal  route  transfers  currently  called  route  exchanges — are  merely 
partial  mergers.  Consequently,  as  with  mergere,  there  would  be  far 
fewer  route  transfers,  if  any,  in  the  absence  of  entry  restrictions. 

Other  asserted  reasons  to  renulate  entry  and  exit  from  air  trans- 
])ortation  markets  are  that  without  such  reqfulation,  there  ^^'ou^d  be 
"destructive,"  or  predatory  conduct  by  airline  firms,  and  "chaotic" 
conditions  Avould  constitut^^  a  sei-ious  public  detriment.  Let  us  examine 
these  fears  in  turn. 


40 

UNFAIR   COMPETITIOX 

In  order  for  predatory  conduct  to  pay  off.  it  is  necessary  for  a  firm 
to  go  through  two  processes :  First,  it  inust  drive  competitors  from  the 
market  by  using  predatory  practices,  such  as  below-cost  price  cuts. 
This  kind  of  conduct  is  costly  to  the  would-be  predator.  Second,  the 
predator  must  recoup  those  costs  by  using  the  resulting  freedom  from 
competition  to  behave  like  a  monopolist.  This  second  step  will  not  be 
possible  if  the  firms  which  were  driven  out  can  reenter  the  market 
quickly  and  easily.  As  I  have  explained,  entrv  into  air  transportation 
markets  generall}^  would  not  be  difficult  to  accomplish  quickly  if  there 
were  no  Government  restriction.  Accordingly,  the  economists  who  have 
Avritten  on  this  matter  have  concluded  that  the  prospects  for  profitable 
predatory  conduct  are  poor  in  this  industry.  Given  these  economic 
facts,  Government  regulation  of  entry  actually  can  cause  the  predator^' 
conduct  it  is  supposed  to  prevent.  A  Goveniment  pi'ohibition  on  entry 
can  be  the  most  effective  insurance  possible  for  a  predator  w^hicli  is 
trying  to  recoup  the  costs  of  predatory  conduct. 

SERVICE    COMPETITION 

Of  course,  if  predatory  conduct  should  take  place  in  the  airline  in- 
dustry, it  is  subject  to  the  antitrust  laws  just  as  it  is  in  another  in- 
dustry, if  it  is  not  somehow  immunized  by  Government  action.  In 
terms  of  pricing  policy,  the  key  point  here  is  that  the  economic 
characteristics  of  the  airline  industry  are  such  that  even  when  the 
Government  eliminates  price  competition,  carriers  still  have  the  in- 
centive to  compete,  and  will  compete  any  way  they  can,  if  only  through 
"frills''  which  are  loss  important  to  passengers  than  price.  Once  a  flight 
is  scheduled,  the  cost  of  carrying  additional  passengers  in  the  airplane 
is  very  low  compared  to  the  cost  of  flying  the  airplane  in  the  first 
place.  Thus,  the  marginal  passenger  on  a  flight  is  very  profitable — 
any  competitive  initiative  which  diverts  passengers  onto  an  airline's 
flight  may  pay  off  richly. 

In  scheduled  service,  it  appears  that  next  to  price,  the  variable  most 
important  to  the  passenger  on  a  scheduled  airline  flight  is  the  ability 
to  find  a  seat  on  a  flight  at  or  near  his  preferred  departure  time.  Conse- 
quently, when  the  price  is  fixed,  competitive  rivalry  is  diverted  into 
capacity  competition — competing  carriers  offer  large  numbers  of 
flights  in  an  attempt  to  cover  as  many  preferred  departure  times  and 
attract  as  many  customers  as  possible.  The  evidence  in  the  recent 
capacity  reduction  agreements  case  is  quite  convincing  that,  even  under 
the  present  system  of  uniform  fares,  carriers  do  not  have  the  incen- 
tive to  offer  ruinous  amounts  of  capacity  simply  because  of  this 
phenomenon.  But  it  is  clear  that  fare  regulation  has  caused  the  airlines 
to  offer  the  consumer  large  numbers  of  flights  and  empty  seats  instead 
of  cheaper  transportation.  Stated  another  way,  they  have  tended  to 
"compete  away"  the  "monopoly  profits"  generated  by  excessively  high 
regulated  fares. 

EVALUATION   OF  THE   DOMESTIC   PASSENGER  FARE   INVESTIGATION 

Allowing  price  competition  by  the  airlines  would  give  them  an  in- 
centive to  offer  consumers  a  choice  as  to  the  combination  of  fare  and 


41 

load  factor  they  want,  and  all  the  evidence  is  that  the  result  would  be 
that  lower  fares  would  be  available  to  the  users  of  scheduled  interstate 
flio:hts.  The  experience  of  the  intrastate  carriers  in  California  and 
Texas  confirms  this.  Of  cour.se,  higher  load  factors  also  would  be  in- 
volved— but  all  this  tells  us  is  that  the  public  would  rather  pay  con- 
siderably less  for  travel,  even  at  the  price  of  being  somewhat  less 
certain  of  getting  on  their  first  choice  of  flight.  Accordingly,  we  were 
disappointed  when  the  Board  rejected  the  arguments  of  the  Depart- 
ments of  Transportation  and  Justice  in  favor  of  allowing  air  carrier^ 
to  price  freely  within  a  "zone  of  reasonableness"  instead  of  requiring 
a  rigid  adherence  to  one  identical  fare  for  all  carriers  offering  servi  'p. 
in  a  particular  market. 

We  were  gratified  that  the  Board  decided  in  Phase  6  of  the  Domestic 
Passenger  Fare  Investigation  to  base  its  fare  decisions  upon  load  factor 
and  seating  configuration  standards  which  excluded  from  the  rate  base 
any  service  amenity  not  included  in  the  Board's  standards  for  such 
service.  Under  the  iPhase  6  policy,  the  fare  is  based  on  the  amount  of 
capacity  associated  with  a  standard  load  factor,  in  a  standard  aircraft 
configuration  set  by  the  Board,  rather  than  the  actual  load  factor  and 
configuration  of  a  particular  carrier  or  the  industry.  We  believe  this 
approach  can  allow  carriers  greater  freedom  to  experiment  with 
different  levels  of  capacity  and  types  of  service  without  being  deprived 
of  the  motive  to  keep  their  services  as  economical  as  possible.  In  Phase 
6  and  the  related  coach  lounge  proceeding,  we  argued  that  the  Board 
violated  the  spirit  of  its  Phase  6  policy  by  attempting  to  punish  a 
carrier  offering  a  different  type  of  service  by  requiring  that  carrier  to 
charge  a  different  fare,  rather  than  simply  requiring  that  carrier  to 
charge  a  fare  based  upon  the  more  economical  aircraft  configuration 
which  the  Board  adopted  as  its  standard.  This  was  the  first  proceeding 
in  recent  years  in  which  we  carried  our  disagreement  with  the  Board 
to  the  court  of  appeals,  and  this  ma.^ter  is  now  pending  rehearing  en 
banc  on  the  Board's  motion  after  a  decision  favorable  to  our  position. 

We  also  have  pending  in  the  court  of  appeals  a  review  of  the  Boards' 
decision  to  extend  rate  regulation  to  the  charter  field  for  the  first  time, 
despite  numerous  arguments  in  opposition. 

The  Board  generally  has  applied  a  specific  "rule  of  reason"  standard 
when  it  decides  whether  or  not  to  approve  an  agreement  which  restrains 
conipetition.  That  is,  if  an  agreement  would  have  substantial  anticom- 
petitive effects  under  established  antitrust  principles,  it  will  not  be 
approved  unless  approval  is  the  only  way  to  meet  a  serious  transporta- 
tion need  or  secure  important  public  benefits.  Until  very  recently,  the 
Department  of  Justice  has  not  participated  in  very  many  proceedings 
concerning  air  carrier  conduct  subject  to  regulation  by  the  Civil  Aero- 
nautics Board.  In  recent  years,  we  have  opposed  capacity  restraint 
agreements  which  have  been  in  effect  in  several  markets  on  the  basis 
of  various  purported  justifications.  The  capacity  agreement  question, 
too,  is  pending  in  the  court  of  appeals. 

CAB   POWER   TO   GRANT   ANTITRUST   IMMUNITY 

Let  me  if  I  might  go  into  detail  briefly  on  the  issue  of  antitrust 
immunity,  which  is  one  of  the  questions  that  will  be  rising  later  here. 

Under  the  present  aviation  act,  the  Board  has  power  to  approve  or 
disapprove  mergers  (section  408),  control  relationships  (section  409), 


42 

and  agreements  among  air  carriers  (section  412).  Section  414  of  the 
Federal  Aviation  Act  provides  that  the  antitrust  laws  shall  not  apply 
to  persons  affected  by  CAB  orders  issued  under  these  three  sections  of 
the  act,  to  the  extent  "necessary  to  enable  such  person  to  do  anything 
authorized,  approved,  or  required  by  such  order."  (40  U.S.C.  1384.) 
The  public  interest  would  be  better  served  if  each  of  the  thr-ee  types  of 
transactions  as  to  which  the  Board  can  confer  immunity  were  evaluated 
under  the  standards  of  the  antitrust  laws,  rather  than  the  general 
"public  interest"  rubric  of  an  administrative  agency. 

It  would  be  desirable  to  remove  the  antitrust  immunity  provisions  of 
section  414  even  if  these  three  types  of  transactions  remain  subject  to 
administrative  review.  This  would  insure  that  the  administrative 
agency  would  not  follow  a  less  procompetitive  standard  than  that  of 
the  antitrust  laws ;  the  safest  way  to  do  this  is  to  eliminate  any  infer- 
ence that  the  Board's  approval  brings  immunity  from  an  antitrust 
lawsuit. 

The  existence  of  the  section  414  immunity  provision  creates  the 
possibility  of  a  lowering  of  competitive  standards  not  only  in  the  reg- 
ulated air  transportation  industry,  but  also  in  industries  not  regulated 
by  the  CAB.  In  a  recent  decision,  the  Supreme  Court  held  that  a 
private  antitrust  action  against  Hughes  Tool  Co.,  a  person  engaged  in 
aeronautics,  was  barred  by  the  Board's  approval  of  and  continuing 
jurisdiction  over  the  control  relationship  which  was  the  basis  of  the 
antitrust  complaint.  The  antitrust  complaint  had  centered  upon  the 
approved  transactions'  competitive  effects  in  the  commercial  aircraft 
manufacturing  industry,  not  in  the  air  transportation  industry  which 
is  regulated  by  the  Board. 

If  any  special  characteristics  of  air  transportation  require  departure 
from  the  undiluted  application  of  the  antitrust  laws,  such  departure 
should  be  effected  by  a  procedure  similar  to  that  of  the  Bank  Merger 
Act  of  1966.  Under  that  statute  a  specialized  regulatory  agency  first 
passes  upon  whether  a  merger  would  violate  the  antitrust  laws,  and 
whether  it  should  nevertheless  be  allowed  liecause  of  specific  over- 
riding public  benefits  which  could  not  be  obtained  by  any  other  means. 
The  transaction  is  then  subject  to  de  novo  review  by  the  United  States 
in  a  district  court. 

Let  me  if  I  might  now,  Mr.  Chairman,  just  very  briefly  address 
several  conclusions. 

There  are  a  variety  of  problems  that  we  have  addressed  in  the  state- 
ment. The  Department  of  Justice  and  other  litigants  sometimes  can 
help  maintain  a  degree  of  reliance  on  competition,  but  under  no  cir- 
cumstances do  we  believe  such  liticration  brines  optimum  results.  Par- 
ties seeking  to  influence  the  Civil  Aeronautics  Board  toward  more 
competitive  policies  are  hampered  by  the  vagueness  and  inclusiveness 
of  the  statutory  standards  among  which  the  Board  may  choose  to 
justify  its  decisions,  and  are  hampered  by  judicial  restraint  in  review- 
ing crucial  aspects  of  agencv  decisionmnkin.o-.  This  is  exacerbated  bv 
the  very  serious  costs  and  delays  of  litigating  economic  issues,  both 
before  the  Board  and  in  the  courts. 

These  problems  will  be  dealt  with  in  greater  detail  in  later  sessions 
of  these  hearings.  It  will  suffice  to  say  now  that  we  do  not  believe  the 
serious  problems  of  air  transport  economic  regulation  will  be  satis- 
factorily corrected  by  litisation  under  present  statutory  standards, 
although  such  litigation  can  help  somewhat. 


43 

Neither  do  we  believe  that  the  optimum  answer  lies  in  the  reform  of 
procedures  under  which  air  carrier  economic  regulation  is  carried  out. 
Unnecessary  regulation  is  still  expensive,  even  if  carried  out  under 
clear  standards  and  optimum  procedures.  It  would  be  possible  to  have 
a  much  narrower  statute  seeking  specific  goals  with  definite  safeguards 
for  competition  and  economic  efficiency.  In  air  transportation,  the 
fundamental  goal  would  be  the  provision  of  efficient  air  transportation 
to  the  public  by  qualified  common  carriers  using  safe  planes  and 
qualified  crews.  A  tightly  drawn  statute  would  prevent  the  Board  from 
limiting  competition  unless  is  made  findings  on  the  record  that  com- 
petition would  compromise  safety  or  reliability  of  service.  Even  under 
such  a  statute,  the  problem  of  preventing  regulation  from  pursuing 
other,  anticompetitive  goals  might  prove  difficult. 

Specifically,  we  believe  that  new  legislation  should  move  toward  the 
following  goals.  First,  entry  and  exit  restrictions  should  be  greatly 
liberalized.  Second,  rate  flexibility  should  be  introduced  through  a 
phased  process,  perhaps  initially  using  a  zone  of  reasonableness.  Eegu- 
latory  intrusion  with  regard  to  rates  within  that  zone  would  not  be 
permitted.  Finally,  existing  antitrust  immunity  should  be  removed, 
along  the  lines  suggested  earlier  in  this  statement. 

There  is  a  broad  consensus  that  reform  must  proceed  along  all  three 
of  these  fronts.  The  administration  has  thus  concluded  that  it  would 
be  appropriate  to  move  toward  much  more  reliance  upon  competition 
in  the  air  transportation  industry,  and  much  less  reliance  upon  Gov- 
ernment economic  regulation.  We  expect  to  present  specific  legislative 
proposals  within  a  short  time  to  the  Congress,  and  specifically  to  this 
committee. 

Thank  you,  Mr.  Chairman. 

Senator  Kennedy.  Thank  you  very  much.  We  will  include  all  of 
your  statement  in  the  record. 

Senator  Kennedy.  Do  I  understand  your  position  correctly  that  you 
would  eliminate  all  antitrust  exemptions? 

Mr.  Kauper.  Well,  I  think  there  are  several  parts  of  that  which  are 
still  under  some  review  as  to  precisely  how  it  should  be  done.  Our 
thinking  at  the  moment  is  that  there  may  be  some  forms  of  agree- 
ments where  a  procedure  not  unlike  the  Bank  INferger  Act.  pursuant 
to  which  the  matter  is  passed  upon  by  the  administrative  agency,  but 
then  subject  to  challenire  by  us  in  the  U.S.  district  court,  may  be  the 
best  way  of  identifying  those  particular  agreements  where  there 
seems  to  some  peculiar  transportaion  need,  where  perhaps  under  con- 
ventional antitrust  analysis,  there  might  otherwise  be  a  problem. 

I  think  it  is  true  that  a  number  of  kinds  of  agreements  which  we,  the 
administration,  feel  should  be  accepted,  probably  in  and  of  them- 
selves do  not  violate  the  antitrust  laws  in  any  event. 

However.  I  think  one  does  have  to  keep  in  mind  that  among  other 
things  we  are  a  litigious  country,  and  it  may  be  in  a  few  cases  the  pro- 
tection provided  by  that  sort  of  immunity  is  desirable  for  that  reason. 
We  are  working  those  detailed  provisions  out.  They  will  be  part  of  the 
proposals  coming  before  you. 

Senator  Kexnf.dy.  Proposals  made  by  whom  ? 

Mr.  Kauper.  By  the  administration,  as  part  of  the  whole  series  of 
administration  proposals  dealing  with  deregulation  in  this  area. 
Senator  Kennedy,  When  are  we  going  to  have  those  ? 


44 

Mr.  Kaiter.  I  think  the  specific  timeframe  is  about  6  weeks;  at 
lea^t  I  think  that  is  about  the  frame  we  are  working  on  now. 

Senator  Kennedy.  And  you  will  spell  out.  then,  as  I  understand  it, 
the  legislation  to  carry  this  forward  ? 

Mr.  Kaiper.  Yes.  it  is  our  expectation,  Mr.  Chairman,  those  will  be 
in  the  form  of  legislative  proposals. 

Senator  Kexxedt.  Are  you  satisfied  with  the  opportunity  for  the 
antitrust  division  to  participate  in  the  regulatory  agencies"  decision- 
making? 

Mr.  Kauper.  Well,  I  think  we  have  been  able  to  participate  in  the 
sense  of  being  a  formal  party.  That  is,  when  there  is  a  particular 
proceeding,  our  views  are  submitted.  We  have,  as  I  think  you  know, 
Mr.  Chairman,  put  a  good  deal  of  time  and  effort  and  resources  into 
exactly  that  sort  of  thing.  So  that  I  do  not  think — let  me  put  it  this 
way — I  do  not  think  the  agency  is  suffering  from  any  want  of  knowl- 
edge of  our  views.  In  fact,  they  probably  have  them  more  than  they 
would  care  for  them. 

Senator  Kennedy.  I  suppose  the  real  question  is  the  power  to  have 
an  impact  on  the  decision. 

Mr.  Ivauper.  Well,  I  think  that  is  a  somewhat  different  question. 
Obviously  in  a  variety  of  these  areas,  once  the  agency  has  arrived  at 
its  decision,  the  ballgame  is  in  large  part  over  from  our  point  of  view. 
That  is,  at  that  point,  it  has  become  a  question  of  antitrust  immunity. 
There  are  some  instances  in  which  we  may  be  able  to  proceed  into  the 
appellate  courts.  That  is  still  a  matter  of  doing  it  by  way  of  review  of 
the  agency  decision,  with  all  the  appropriate  weight  an  appellate 
court  gives  to  an  agency  determination. 

So  I  think  the  suggestion  is  that  we  follow  a  procedure  that  would 
contemplate  that  we  ourselves  would  have  an  independent  ability  to 
go  to  court.  I  think  that  is  what  is  necessary.  There  is  implict  in  that, 
in  terms  of  our  powers,  that  they  are  not  adequate  at  the  present  time. 

Senator  Kennedy.  Are  you  going  to  recommend  that  Congress  give 
you  more  power  in  this? 

Mr.  Kauper.  Yes,  I  think  that  would  be  one  result  of  the  proposal. 

Senator  Kennedy.  Can  you  give  us  a  little  bit  better  idea  how  the 
consumers-  interests  will  be  served  with  this  opportunity  that  you 
describe  here  ? 

Mr.  Kauper.  Well,  I  think,  Mr.  Chairman,  it  is  our  feeling  the  con- 
sumer usually  benefits  in  a  whole  variety  of  ways  through  competi- 
tion, and  I  suppose  that  variety  would  be  present  here.  We  would 
anticipate  lower  fare  levels.  We  also  contemplate  that  the  consumer 
would  have  some  choice,  which  in  large  part  he  does  not  today  have. 
He  does  not  have  a  choice  as  to  whether  he  wants  a  meal  served  to 
him  on  a  given  plane  or  whether  he  does  not.  He  is  going  to  pay  for 
it  in  any  event.  He  does  not  have  any  choice  on  the  fare  structure. 

So  I  would  expect  we  would  see  improvement  not  only  when  he 
pays,  but  in  the  choices  available  to  him.  Those  are  the  normal  results 
of  competition,  and  I  see  no  reason  why  we  would  see  anything  dif- 
ferent here. 

Senator  Kennedy.  Well,  if  this  is  carried  forward,  you  do  not  think 
it  will  make  it  more  difficult  for  the  airlines  to  make  agreements  with 
regards  to  passenger  interests,  such  as  common  baggage  handling  for 
connecting  flights  and  reservation  systems  ? 


45 

Mr.  Kauper.  It  should  not  make  those  things  more  difficult.  We 
are  as  concerned  as  anybody  that  the  joint  operations  which  are  in 
existence  and  provide  a  continuity  of  service  to  the  passenger  be 
continued.  That  is  not  the  major  concern  of  our  proposal. 

Senator  Kennedy.  Do  they  need  antitrust  exemptions  for  those 
agreements  ? 

Mr.  Kauper.  I  think  there  are  many  kinds  of  agreements,  and 
many  of  them  probably  do  not.  There  may  be  some  kind  of  arrange- 
ment with  respect  to  the  use  of  airports,  for  example,  that  might  lend 
themselves  to  antitrust  complaints,  that  might  technically  be  a  refusal 
to  deal  or  so  on  that  might  invite  a  challenge  by  a  third  party. 

Generally,  there  is  a  pretty  good  concensus  as  to  the  nature  of  these 
agreements,  and  it  is  simply  the  right  of  the  mechanics  of  doing  it. 
There  is  not  any  particular  disagreement  over  their  nature  or  whether 
they  should  be  permitted. 

Senator  Kennedy.  What  are  you  doing  about  international  rate- 
setting  ? 

Mr.  Kauper.  I  did  not  come  up  here  today  with  all  of  the  prepara- 
tion on  international  affairs,  but  I  think  what  we  are  doing  at  the 
moment  is  participating  in  additional  administration  efforts  to  try 
to  reexamine  these  policies.  It  is  a  considerably  more  complicated 
process  and  that  is  one  of  the  reasons  we  have  not  addressed  that.  It  is 
complicated  by  the  bilateral  arrangements  between  governments  with 
respect  to  air  carriers  and  a  variety  of  things  that  make  that  a  more 
complex  matter.  I  think  all  I  can  say  on  that  today,  Mr.  Chairman, 
is  there  is  additional  work  going  on  on  the  whole  international  struc- 
ture and  the  fare-making  process.  I  would  hope  there  would  be  some 
additional  recommendations  coming  out  of  that. 

Senator  Kennedy.  Do  you  believe  that  this  system  is  really  a  sort 
of  price-fixing  cartel  ? 

Mr.  Kauper.  Well,  I  do  not  think  there  is  any  way  one  could  not  call 
it  a  price-fixing  cartel.  It  is  quite  clearly  that.  It  is  an  agreement  among 
airlines  with  respect  to  fares.  Whether  or  not  there  are  reasons  for 
that  particular  structure,  where,  after  all,  you  do  not  have  a  single 
government  in  charge  of  regulation,  but  certainly  it  functions  just  as 
any  other  cartel  would  in  setting  fares.  In  any  classic  definition  of 
cartel,  I  would  suppose  it  is  one. 

Senator  Kennedy.  OK. 

I  want  to  thank  you  very  much. 

Mr.  Kauper.  Thank  you,  Mr.  Chairman. 

[The  prepared  statement  of  Mr.  Kauper  follows :] 

Prepared    Statemen^t   of   Thomas   E.   Kauper.   Assistant   Attorney   General, 
Antitrust  Division.  Department  of  Justice 

Airline  Regulation  by  the  Civil  Aeronautics  Board 

Mr.  Chairman,  I  am  happy  to  be  here  today  to  present  the  views  of  the 
Department  of  Justice  and  to  report  on  the  work  that  the  Administration  is 
doing  on  economic  regulation  of  domestic  air  transportation. 

Airline  regulation  needs  review  at  this  time.  For  37  years,  we  have  operated 
under  a  statutory  arrangement  which  assumed  that  airline?;  were  like  railroads, 
requiring  extensive  rate  and  entry  regulation :  that  subsidized  mail  carriage  was  a 
dominant  concern  ;  and  that  the  airline  busniess  was  an  industry  requiring  special 
government  promotional  efforts  on  its  behalf.  We  all  know  that  much  has  hap- 
pened during  those  37  years.  We  know  that  airlines  are  not  like  railroads,  that 


46 

open  comretition  and  entry  policies  have  worked  in  California  and  Texas  to 
produce  higher  load  factors  and  lower  fares.  We  know  that  the  airlines  have 
become  the  leading  source  of  public  inter-city  transport  and  that  the  mail  busi- 
ness is  utterly  dwarfed  by  passenger  business. 

Airline  costs  affect  us  all  as  citizens,  taxpayers  and  consumers.  They  affect  us 
when  we  buy  products,  when  we  carry  out  our  jobs,  and  when  we  travel  for 
pleasure. 

Airline  costs  are  in  turn  directly  affected  by  airline  regulation — for  it  is 
regulation  which  tells  carriers  on  which  routes  they  can  conii)ete  and  what  means 
of  competition  they  can  use.  Basically,  it  keeps  entiy  tight,  while  allowing  car- 
riers to  compete  in  terms  of  service  but  not  price.  The  result  is,  as  you  would 
expect,  a  system  which  sets  both  price  and  service  at  leAcls  above  what  they 
would  be  in  a  competitive  market,  in  other  words,  there  are  more  planes,  with 
more  empty  seats,  and  the  customer  pays  more  than  he  would  under  a  regime  of 
open  comi>etition.  Thus,  competitive  operations  in  California  have  generally 
produced  fare  levels  that  were  40  percent  lower  than  the  CAB  approved  fare 
level,  while  the  carriers  have  enjoyed  considerably  higher  load  factors. 

For  years,  nobody  much  worried  about  CAB  price  and  entry  policies,  because 
we  were  in  a  continuing  trend  of  improving  equipment,  declining  cost,  declining 
prices  and  rapidly  growing  traffic.  The  airline  traveler's  world  was  getting  better, 
even  though  CAB  rate  and  entry  regulation  was  probably  slowing  down  at  least 
the  rate  at  which  fares  declined,  and  encouraging  excess  capacity. 

Now,  however,  the  situation  has  changed.  Due  to  sharply  higher  fuel  and  labor 
costs,  airlines  have  requested,  and  the  Board  has  approved,  a  whole  series  of 
fare  increases,  which  have  come  at  a  time  when  the  public  at  large  was  if  any- 
thing less  able  to  pay  these  fares.  At  the  same  time,  the  Board  has  actively  sought 
to  cut  back  on  low-price  air  travel,  through  limitations  on  promotional  fares  and 
restrictions  on  charter  activity.  The  result  of  all  this  has  been  to  raise  fares 
considerably  for  everyone  and  to  raise  them  enormously  for  certain  classes  of 
users.  The  overall  effect  has  been  to  produce  an  almost  unprecedented  substantial 
reduction  in  air  travel — more  empty  seats  on  scheduled  flights  and  fewer  charter 
flights.  The  reduction  in  demand  has  tended  to  push  up  the  airlines'  unit  costs, 
since  they  have  had  to  spread  out  their  fixed  costs  over  fewer  passengers.  This 
in  turn  has  provided  the  impetus  for  renewed  fare  increases,  a  situation  likely  to 
further  reduce  air  travel  and  hence  again  increa.se  unit  costs.  The  resulting  spiral 
of  increasing  fares  and  costs  means  that  the  smaller  proportion  of  the  public 
which  can  afford  to  fly  gets  reduced  service  at  increased  prices. 

We  in  the  Administration  have  been  studying  for  some  time  how  to  break  out 
of  this  upward  spiral  of  prices  and  costs.  We  have  concluded  that  the  most  hope- 
ful avenue  is  a  substantial  relaxation  of  existing  price  and  entry  regulation, 
which  forces,  or  at  least  strongly  urges,  carriers  to  offer  excessive  amounts  of 
unused  seats  at  excessively  high  fares.  That  system  of  regulation  has  in  addition 
prevented  innovative  newcomers  from  coming  into  the  business  of  interstate  air 
transportation,  in  the  interest  of  protecting  the  established  carriers  against  new 
competition.  We  believe  that  more  open  competitive  pricing,  if  given  a  chance, 
would  broaden  the  carriers'  entrepreneurial  opportunities  by  giving  them  a  chance 
to  compete  with  lower  fares  as  well  as  with  extra  seats.  We  believe  that  it  would 
tend  to  bring  interstate  air  transportation  more  into  line  with  what  we  saw  in 
California  and  Texas :  an  environment  of  lower  fares  and  fuller  planes.  If  this 
occurs — and  both  actual  experience  and  economic  theory  suggest  that  it  will — we 
will  have  found  a  basis  for  breaking  the  cycle  of  rising  costs  and  declining  serv- 
ice. Lower  prices  are  likely  to  come  quite  quickly  and  lower  prices  are  likely  to 
encourage  new  traffic  quite  quickly.  By  the  same  token,  liberalized  entry  rules — 
an  environment  with  less  emphasis  on  route  protection — are  likely  to  get  onto 
the  routes  those  carriers  who  are  most  eflicient  at  serving  them.  In  a  competitive 
environment,  such  efficiencies  can  in  turn  be  passed  on  to  the  traveler  in  the  form 
of  lower  fares. 

The  Department's  perspective  on  airline  regulatory  problems  is  based  of  course 
on  our  experience  in  enforcing  the  antitrust  laws  in  a  great  variety  af  industries 
having  a  diversity  of  cost  and  capital  characteristics.  It  is  based  on  our  extensive 
participation  before  the  CAB  in  a  variety  of  proceedings.  And  it  is  based  on  our 
experience  in  antitrust  enforcement  in  other  regulated  industries,  some  of  which 
have  economic  characteristics  similar  to  those  of  air  transportation.  Our  experi- 
ence tells  us  that  regulated  firms  I'arely  welcome  freer  entry  rules  and  more 
flexible  pricing.  They  generally  want  to  be  protected  from  outsiders  and  protected 
from  each  other  by  a  benevolent  regulator.  In  the  airline  field,  regulated  firms 


47 

generally  have  opposed  pricing  flexibility  and  offered  capacity  cartel  agreements 
instead,  let  our  experience  also  tells  us  that  in  fact  competition  works  in  reg- 
ulated environments  much  more  efficiently  than  the  regulated  firms  generally 
believe;  and  we  find  increasing  use  of  competition  in  place  of  direct  regulation 
as  a  tool  to  promote  efficiency  in  a  number  of  regulated  environments,  ranging 
from  wholesale  electric  power  to  securities  markets. 

The  Department  is  currently  working  with  the  Department  of  Transportation, 
the  Council  of  Economic  Advisers,  the  Council  on  Wage  and  Price  Stability  and 
the  Office  of  Management  and  Budget  to  develop  detailed  Administration  pro- 
posals which  respond  to  this  reality  in  the  transportation  sector.  We  hope  to 
have  detailed  proposals  for  air  transport  regulation  reform  for  presentation  to 
the  Congress  in  the  near  future.  At  this  point,  these  agencies  have  arrived  at  a 
broad  consensus  in  principle,  which  we  will  discuss  today. 

We  all  agree  that  regulation  of  rates  and  routes  has  been  excessive  and  has 
inflated  present  cost  and  fare  levels. 

We  believe  the  government  should  regulate  the  airlines  where  necessary  to 
ensure  the  safety  and  reliability  of  air  transportation — but  this  clearly  does  not 
require  direct  government  regulation  of  airline  pricing  and  entry  to  the  current 
extent.  We  believe  the  focus  of  government  regulation  of  the  airlines  should  be 
on  these  essentially  noneconomic  goals,  with  clear  standards  and  procedures 
which  ensure  that  regulatory  powers  are  not  used  to  unnecessarily  limit  competi- 
tion. Even  if  full  rate  regulation  is  deemed  necessary  to  deal  with  certain  prob- 
lems— for  instance,  the  prevention  of  monopoly  pricing  in  certain  markets — 
such  regulation  should  be  carefully  crafted  to  limit  and  clarify  goals,  standards 
and  procedures. 

The  present  Federal  Aviation  Act  does  not  identify  limited  specific  economic 
goals  and  set  forth  standards  and  procedures  to  achieve  those  goals  and  avoid 
undesirable  side  effects.  Rather,  it  offers  the  Board  an  open-ended  mandate, 
which  can  be — and  frequently  is — used  to  protect  carriers  rather  than  the  travel- 
ing public,  and  to  protect  operating  inefficiencies  which  ultimately  must  be  paid 
for  by  the  public. 

Reform  only  of  procedural  (rather  than  substantive)  provisions  of  the  Act 
cannot  correct  the  fundamental  problem  of  its  ambiguous  and  sometimes  conflict- 
ing stated  objectives. 

Procedural  reform  of  the  Act  might  well  be  desirable,  but  it  is  not  likely  to  be 
successful  without  a  narrowing  and  clarification  of  the  standards  the  Board 
may  apply  in  making  economic  decisions,  and  of  the  scope  of  airline  activities 
subject  to  those  decisions.  Such  a  redefinition  of  the  Act's  economic  goals  and 
standards  would  be  a  substantial  improvement.  And  in  our  view,  such  a  re- 
definition would  call  into  question  the  continued  usefulness  of  much  of  present 
economic  regulation. 

The  Administration  group  also  agrees  that  the  CAB  should  not  be  given  broad 
authority  to  immunize  from  the  antitrust  laws  all  the  private  agreements  and 
mergers  it  approves.  Accordingly,  our  proposals  will  provide  for  a  much  narrower 
area  of  antitrust  exemption,  and  for  a  merger  approval  approach  generally 
modeled  on  the  Bank  Merger  Act  of  1966  (which  allows  the  courts  to  adjudicate 
the  legality  of  a  merger  under  the  antitrust  laws,  subject  to  agency  participation 
on  broader  public  interest  issues). 

To  explain  the  basis  for  these  rather  broad  conclusions,  I  will  sketch  briefly 
the  circumstances  which  led  to  the  imposition  of  federal  economic  regulation  of 
the  airlines,  describe  what  I  believe  tojie  the  lessons  of  major  CAB  economic 
regulatory   proceedings,   and  attempt  to  outline  some  preliminary  conclusions. 

I.    A   BRIEF    HISTORY   OF   FEDERAL  ECONOMIC   KEGTJLATIOX    OF   AIR  TRANSPORTATION 

Federal  regulation  of  air  transportation  has  developed  primarily  along  two 
paths :  one  set  of  statutes  which  regulate  safety,  airport  and  airway  affairs,  and 
another  specifically  directed  toward  the  regulation  of  the  economics  of  air  trans- 
portation. Tl.e  first  category  of  statutes  has  been  the  responsibility  of  the  Depart- 
ment of  Transportation  and  the  National  TransiJortation  Safety  Board  for 
several  years.^  The  economic  regulatorj-  system  which  the  Civil  Aeronautics 
Board  administers  is  now  embodied  by  the  Federal  Aviation  Act  of  1958,  as 
amended.* 


1  Federal   Aviation   Act  of  1958.   72   Stat.   7.31.  49   U.S.C.    1301   et  seq.  ;  Department  of 
Transportation  Act  1966,  80  Stat.  931,  49  U.S.C.  16.51. 
a  Id. 


48 

The  origins  of  airline  economic  regulation  are  usually  traced  to  the  Civil 
Aeronautics  Act  of  1938,^  which  generally  followed  the  outline  of  the  Interstate 
Commerce  Act  in  setting  up  most  of  the  major  regulatory  features  of  today's 
Federal  Aviation  Act.  There  had  been  partial  economic  regulation  of  air  carriers 
prior  to  1938,  however.  After  experimenting  with  several  different  means  of 
administering  a  system  of  subsidized  air  transport  of  mail,  the  Congress  deter- 
mined in  1930  to  grant  the  Postmaster  General  broad  powers  over  the  routes, 
rates,  and  practices  of  carriers  carrying  air  mail  under  contract  with  the 
government.*  In  1935,  the  Congress  broadened  this  regulation  to  prohibit  car- 
riers with  air  mail  contracts  from  engaging  in  any  service  on  routes  other  than 
their  airmail  routes  if  such  service  would  compete  with  another  carrier  having 
an  airmail  contract  on  that  route.*  The  predominance  of  mail  over  passenger 
service  was  rapidly  diminishing  throughout  this  period,  however,  and  by  1937 
air  carrier  income  from  passenger  service  was  twice  as  great  as  mail  income." 
Unregulated  carriers  without  airmail  contracts  began  to  compete  with  airmail 
carriers,  who  naturally  complained  about  their  unregulated  competitors'  greater 
economic  freedom." 

The  Interstate  Commerce  Commission,  v.'hich  obtained  economic  regulatory 
powers  over  motor  carriers  in  1935,**  pressed  for  the  extension  of  economic  regu- 
lation over  all  air  carriers."  under  the  general  theory  that  it  is  unfair  and 
"chaotic"  for  unregulated  firms  to  be  allowed  to  compete  with  regulator  firms.^" 

The  protection  of  a  sul)sidized  airmail  system  was  a  vital  objective  of  the 
drafters  of  the  1938  Act.  Even  today,  a  very  high  percentage  of  the  provisions  of 
that  Act,  as  amended,  still  are  concerned  with  the  carriage  of  mail.  Today, 
although  the  mail  system  is  of  crucial  importance,  it  is  a  small  percentage  of  the 
air  transportation  business.  There  certainly  would  be  no  logical  basis  today  for 
designing  the  entire  air  transportation  system  around  the  mail  system,  because 
the  needs  of  the  postal  service  can  be  met  with  relatively  small  and  specific 
modifications  to  the  larger  air  system. 

Just  as  the  "chaotic"  conditions  generated  by  the  efforts  to  develop  an  airmail 
system  have  disappeared  today,  we  no  longer  experience  two  other  very  important 
factors  which  led  to  the  creation  of  airline  economic  regulation  in  1938.  The 
Great  Depression  had  shaken  our  .society's  confidence  in  the  free  market  system, 
and  led  to  a  number  of  laws  which  substituted  direct  government  economic  regu- 
lation of  business  organizations  for  the  maintenance  of  free  conii>etition.  Also, 
air  transportation  in  the  1930's  was  thought  to  suffer  from  undue  division  of 
governmental  regulatory  authority  among  the  Commerce  Department,  the  Post 
OflSce  Department,  and  the  Interstate  Commerce  Commission,  "  and  it  was  con- 
sidered a  very  important  function  of  the  1938  Act  to  combine  and  coordinate 
all  of  these  functions  within  one  agency."  Thus,  the  'caotic  and  destructive"  con- 
ditions which  frquently  are  thought  to  be  the  1938  Act's  genesis  are  now  only  a 
matter  of  history. 

As  this  history  indicates,  airline  regulation  must  be  viewed  against  the  partic- 
ular background  of  the  circumstances  which  created  it  in  order  to  understand 
its  goals.  Various  parties  involved  in  the  drafting  and  pas.sage  of  the  original 
1938  Act  made  references  to  their  desire  to  allow  regulation  of  "chaotic"  competi- 
tion among  air  carriers,  and  given  the  above  description  of  the  Act's  historical 
context,  such  as  desire  seems  understandable.  The  drafters  of  the  Act,  however, 
vehemently  denied  any  intention  to  allow  the  Board  to  restrain  competition  or 
create  monopolies."  The  Act  itself  directed  the  Board  to  maintain  "competition 
to  the  extent  necessary"  to  pursue  other  rather  inclusive  goals,"  and  explicitly 


3  52  Stat.  973. 

*46  Stat.   259    (1930). 

B49  Stat.  619. 

«C.  S.  Rhyne,  The  Civil  Aeronautics  Act  Annotated  (1939),  p.  35. 

T  Id.  32-33. 

s  Motor  Carrier  Act  of  1935,  49  U.S.C.  301  et  seq. 

9  Rhyne,  supra,  32-33. 

1"  The  ICC  advanced  similar  arjcuments  with  re.spect  to  competing  surface  modes.  Boies, 
Experiment  in  Mercantilism  :  Minimum  Rate  Regulation  by  the  ICC,  68  Colum.  L.R.  599, 
614-15  ;  J.  Meyer,  M.  Peck.  J.  Stenason,  C.  Zwich,  Economics  of  Competition  in  the  Trans- 
portation Industries  10  (1964)  ;  Report  of  the  Attorney  General's  National  Committee  to 
Study  the  Antitrust  Laws  269  (1955)  ;  Coordination  of  Motor  Transportation,  183  ICC 
263  (1932). 

^  As  noted  above,  certain  of  the  noneconomic  regulatory  functions  conferred  upon  the 
CAB's  predecessor  agency  were  later  transferred  to  other  agencies.  See  note  1,  supra. 

"H.  Rept.  vo.  22.54.  75th  Cong.,  3rd  Sess.,  April  28,  1938;  83  Cong.  Rec.  5960. 

"83   Cong.   Rec.   6729-32. 

"  Section  1,  49  U.S.C.  sec.  1301. 


.      49 

directed  the  Board  to  observe  conventional  antitrust  principles  in  deciding  merger 
and  interlocking  control  cases/^ 

The  Act  s  reliance  upon  competition  among  air  carriers  shows  that  the  Con- 
gress clearly  did  not  regard  air  transportation  operations  as  having  "natural 
monopoly"  characteristics  which  required  government  control  in  the  place  of  the 
discipline  of  competition.  Unlike  the  usual  statute  regulating  a  •"natural  monop- 
oly,' the  Act  does  not  require,  but  rather  prohibits,  government  control  of  the 
regulated  firms"  investment  in  equipment  or  facilities,  and  of  the  specific  services 
tliey  provide  under  their  certihcates."  Instead  of  detailed  control  of  the  rate 
base,  regulation  was  extended  to  fares,  entry  and  exit  from  specific  routes,  and 
agreements  and  mergers. 

Other  characteristics  of  the  original  1938  Act  seem  to  have  been  included 
largely  because  the  Interstate  Commerce  Act  was  taken  as  a  model.  Thus  the 
1938  Act  prohibited  discrimination,  preference  or  prejudice  among  various  users 
of  air  transportation,  requireu  joint  fares  for  connecting  trafiic,  and  allowed 
classification  of  regulated  air  carriers  into  various  categories. 

II.    THE   LESSONS   OF   MAJOR   CAB   ECONOMIC  PROCEEDINGS 

With  that  background  on  the  origins  of  the  present  Act,  I  will  now  turn  to  the 
way  it  has  been  administered,  and  what  we  have  learned  in  the  process. 

Market  structure 

The  first  category  of  major  CAB  economic  cases  are  those  in  which  the  basic 
structure  of  the  airline  industry  itself  was  at  issue.  In  the  last  15  years,  the 
Department  of  Justice  has  opposed  three  major  trunk  air  carrier  merger  pro- 
posals,^' which,  had  they  been  approved,  would  have  substantially  redrawn  the 
route  map  of  the  U.S.  domestic  system,  and  considerably  increased  the  already 
very  great  concentration  of  the  airline  industry  in  the  hands  of  a  very  few  large 
trunk  air  carriers. 

In  1962,  we  opposed  the  proposed  American-Eastern  merger  before  the  Board. 
The  hearing  exajniner  ruled  in  our  favor,  finding  that  consummation  of  the  merger 
would  create  an  airline  with  more  than  one-third  of  the  entire  domestic  airline 
industry's  business,  greatly  increase  existing  economic  concentration  in  the  air- 
line industry,  create  a  regional  monopoly  in  the  northeastern  United  States,  and 
create  numerous  city-pair  monopolies  within  that  region.  The  merger  proposal 
was  subsequently   withdrawn. 

Ten  years  later,  the  Department  opposed  the  merger  of  Western  Airlines  with 
American  on  similar  grounds,  although  there  was  very  little  actual  overlap 
between  the  American  and  Western  systems.  The  hearing  examiner  recom- 
mended disapproval,  essentially  on  nonantitrust  grounds,  and  the  merger  was 
withdrawn  after  the  Board  issued  an  order  disapproving  it. 

A  merger  proposal  between  National  Airlines  and  Northwest  Airlines,  which 
we  opposed  on  the  grounds  that  it  would  increase  concentration  in  the  trunk 
airline  industry  and  destroy  important  potential  comi^etition  between  the  two 
merger  partners,  also  was  withdrawn  after  the  hearing  examiner  issued  a  decision 
recommending  disapproval  on  antitrust  grounds.  In  the  last  few  years,  the 
Department  also  has  studied  several  other  major  airline  merger  proposals 
which  were  never  filed  and  litigated  at  the  CAB. 

These  merger  proposals  have  raised  very  serioug  questions  as  to  the  proper 
structure  of  the  industry,  both  as  to  the  need  for  the  proposed  merger  and  as 
to  its  likely  effect  on  competition  and  other  important  economic  processes.  As  a 
result  of  studying,  testing  and  arguing  the  evidence  in  these  cases,  we  have 
come  to  the  conclusion  that  in  the  absence  of  economic  regulation,  the  air  trans- 
portation industry  probably  would  have  a  reasonably  fiexible,  competitive 
structure  which  would  serve  the  public  better  than  the  present  government- 
controlled  structure.  Experience  under  economic  regulation,  and  in  unregulated 
air  transportation  where  available,  indicates  that  the  industry  tends  to  have  a 
"competitive"  structure,  rather  than  being  a  "natural  monopoly"  which  must  be 
regulated  in  the  interests  of  the  public. 


IS  Section  408(b),  49  U.S.C.  sec.  1378. 

"Section  401(e)(4),  49  U.S.C.  sec.  1371. 

"  See  American-Eastern  Merger.  Recommended  Decision  of  Hearing  Examiner  Ralph  L. 
Waser,  docket  13355,  November  27,  1962  ;  American- Western  Merger  Case,  orders  72-7-91 
and  72-7-92,  and  docket  22916,  June  13,  1972  ;  Northwest-National  Merger  Agreement, 
Recommended  Decision  of  Associate  Chief  Examiner  Robert  L.  Park,  docket  23852,  May  22, 
1972. 


51-146   O  -  76  -  pt.  1  -  5 


50 

Evidence  is  quite  abundant  that  there  are  no  important  economies  of  scale  in 
air  transportation  ;  that  is,  larger  firms  are  not  more  efficient  or  less  costly  simply 
because  of  their  size.  In  fact,  other  things  being  equal,  the  largest  air  carriers 
tend  to  have  a  higher  level  of  unit  costs,  and  there  are  some  indications  that 
these  increased  costs  are  caused  by  the  difficulties  of  managing  an  airline  of 
very  large  size.^^ 

The  reasons  for  this  are  apparent — the  airlines'  "right  of  way"  is  the  air  itself, 
and  their  "tracks"  if  any,  are  the  air  traflSc  control  guideways  maintained  by 
the  Federal  Government.  Well  over  80  percent  of  the  airlines'  investment  is  in 
flight  equipment,  which  is  among  the  most  mobile  of  assets,  rather  than  in  fixed 
assets,  as  is  the  case  in  the  classical  "natural  monopoly."  "  Not  only  does  this 
make  competitive  service  economically  feasible,  but  it  makes  duplication  of  routes 
far  less  risky,  because  competitors  can  more  easily  adjust  their  operations  by 
rescheduling  an  aircraft  from  one  city-pair  to  another — assuming  that  the  gov- 
ernment does  not  prevent  them  from  doing  so. 

In  view  of  this  conclusion  that  air  carriers  will  not  become  more  eflScient  or 
more  profitable  by  merging  to  become  larger,  why  have  so  many  mergers  been 
proposed?  Perhaps  the  most  important  reasons  for  mergers  among  the  regulated 
air  carriers  have  been  the  effects  of  regulation  itself.  Air  carriers  knovv  that 
when  they  hold  a  certificate,  it  is  the  nature  of  economic  regulation  that  the 
Board  will  to  a  greater  or  lesser  degree  protect  them  from  entry  by  new  com- 
petitors on  that  route.  Similarly,  the  air  carriers  knovv  that  they  cannot  expand 
onto  a  new  route  without  obtaining  a  certificate.  Consequently,  any  certificated 
air  carrier,  no  matter  how  poorly  run  and  how  debilitated  financially  ana  opera- 
tionally, has  one  very  valuable  asset — its  route  certificate.  This  asset  typically 
has  been  sold  by  merger  of  weak  carriers  into  stronger  carriers.  As  a  result,  no 
large  federally  certificated  air  carrier  has  gone  out  of  business  other  than  through 
merger  with  another  federally  certificated  air  carrier.  Because  the  Board  has 
allowed  virtually  no  new  firms  to  join  the  ranks  of  tlie  certificated  air  ca.riers, 
there  has  been  a  steady  diminution  in  the  number  of  air  carriers  with  certificates 
from  the  Federal  Government. 

It  has  been  observed  that  during  the  period  when  California  intrastate  airlines 
were  essentially  free  from  economic  regulation,  many  firms  entered  and  left  the 
market,  but  none  of  them  left  the  market  through  merger.  One  very  careful  eco- 
nomic study  of  this  phenomenon,  and  the  contrast  between  unregulated  California 
airlines  and  the  regulated  interstate  airlines  makes  a  convincing  and  apparently 
unrebutted  case  that  in  the  absence  of  economic  regulation,  there  probably  would 
have  been  many  more  competing  airlines  in  the  United  States  than  the  CAB  has 
allowed  to  exist.*" 

As  long  as  new  certificates  are  not  freely  given,  one  would  expect  that  there 
would  be  some  transfer  of  certificates  as  carriers  seek  to  reorganize  their  route 
authorities.  However,  sale  or  trade  of  certificate  authority  has  been  fairly  rare, 
although  not  unprecedented,  becau.se  until  lately  the  Civil  Aeronautics  Board  did 
not  encourage  such  "trafficking  in  certificates."  Recently,  the  Board's  willingness 
to  consider  transfer  of  certificate  authority  has  led  to  a  number  of  "route  swap" 
proposals. 

When  there  is  limited  entry,  we  believe  that  transfers  of  certificate  authority 
very  well  may  provide  a  practical  means  of  reorganizing  certificated  route  author- 
ity in  a  form  more  closely  aligned  with  the  economic  or  operational  requirements 
of  the  air  transportation  system.  The  carriers'  objective  in  a  route  swap  is,  of 
course,  to  increase  profits.  In  cases  where  the  increase  in  profits  would  take  place 
becau.se  the  route  can  be  served  more  efficiently  as  part  of  the  transferee's  route 
system,  we  believe  the  transfer  of  authority  may  well  be  in  the  public  interest. 

Tlie  motive  for  a  route  transfer,  however,  may  be  to  eliminate  competition,  as 
where  two  carriers  both  possess  authority  on  a  given  route,  and  one  proposes  to 


"In  the  American-Western  Merger  Case,  (locket  22916,  see  exhibits  DOT-T-1  ;  CO-RT- 
500,  pp.  7.  16-24;  CO-R-512-ol7  ;  CO-R-.528-529  ;  RW-120-12,5  ;  RW-SR-900  ;  BOR-R- 
100.  In  the  National-Northwest  Merger  Case,  docket  23852,  see  exhibits  DOT-T-1,  DJ-1, 
DJ-RT-1,  and  Transcript  pp.  1412-13. 

The  numerous  academic  studies  in  this  area  apparently  all  conc'ude  that  there  are  no 
economies  of  scale  in  the  airline  industry  above  the  size  of  the  very  smallest  air  carriers. 
See  sources  cited  in  G.  Douglas  and  .1.  Mil'er.  Economic  Regulation  of  Domestic  Air  Trans- 
port (1974),  pp.  14-15,  and  W.  .Tordan,  Airline  Regul.ition  in  America  (1970),  pp.  191-194. 

The  Board  itself  hf\s  endorsed  in  general  terms  the  conclusion  that  there  are  constant 
returns  to  scale  in  the  industry.  Domestic  Passenger  Fare  Investigation,  phase  5 — Dis- 
count Fares,  order  72-12-18  (December  5.  1972).  p.  48. 

"  \merican-Western  Case,  supra,  exhibit  D.T-RT-1,  p.  5  ;  see  also  order  72-12-18,  supra, 
p.  48. 

20  Jordan,  supra,  pp.  14-33. 


51 

transfer  its  authority  to  the  other,  eliminating  competition  between  the  route 
swap  partners  on  that  route.  In  such  cases  the  public  is  likely  to  be  injured  by 
the  xeduction  in  competition  on  that  route.  We  have  opposed  some  anticompeti- 
tive route  exchange  proposals,  notably  the  American-Pan  American  route  ex- 
change involving  Caribbean  and  South  Pacific  routes,"'  and  the  Pan  American- 
TWA  agreement,'-  which  involves  both  Atlantic  and  Pacific  routes. 
Generally  speaking,  route  transfers,  including  the  reciprocal  route  transfers  cur- 
rently called  route  exchanges,  are  merely  partial  mergers.  Consequently,  as  with 
mergers,  there  would  be  far  fewer  route  transfers,  if  any,  in  the  absence  of  entry 
restrictions.^^ 

We  have  seen  that  the  "natural  monopoly"  argument  for  regulating  entry  and 
exit  finds  no  support  in  the  facts  of  air  transportation  economics.  Other  asserted 
reasons  to  regulate  entry  and  exit  from  air  transportation  markets  are  that 
without  such  regulation,  there  would  be  "destructive,"  or  predatory  conduct  by 
airline  firms,  and  "chaotic"  conditions  would  constitute  a  serious  public  detri- 
ment. Let  us  examine  these  fears  in  turn. 

In  order  for  predatory  conduct  to  pay  off,  it  is  necessary  for  a  firm  to  go  through 
two  processe.< :  First,  it  must  drive  competitors  from  the  market  by  using  preda- 
tory practices,  such  as  below-cost  price  cuts ;  this  kind  of  conduct  is  costly  to  the 
would-be  predator.  Second,  the  predator  must  recoup  those  costs  by  using  the  re- 
sulting freedom  from  competition  to  behave  like  a  monopolist.  This  second  step 
will  not  be  possible  if  the  firms  which  were  driven  out  can  reenter  the  market 
quickly  and  easily.  As  I  have  explained,  entry  into  air  transportation  markets 
generally  would  not  be  difficult  to  accomplish  quickly  if  there  were  no  government 
restriction.  Accordingly,  the  economists  who  have  written  on  this  matter  have 
concluded  that  the  prospects  for  profitable  predatory  conduct  are  poor  in  this 
industry.-* 

Given  these  economic  facts,  governinent  regulation  of  entry  actually  can  cause 
the  predatory  conduct  it  is  supposed  to  prevent.  A  government  prohibition  on 
entry  can  be  the  most  effective  insurance  possible  for  a  predator  which  is  trying 
to  recoup  the  costs  of  predatory  conduct. 

Of  course,  if  predatory  conduct  does  take  place  in  the  airline  industry,  it  is 
subject  to  the  antitrust  laws  just  as  it  is  in  another  industry,  if  it  is  not  somehow 
immunized  by  government  action. 

In  the  New  England  sen'ice  investigation,  where  the  benefits  of  entry  and  exit 
regulation  for  small  (and  presumably  relatively  less  stable)  air  carriers  were 
directly  in  issue,  the  Administrative  Law  Judge  found  on  the  basis  of  the  record 
tliat  there  had  been  no  evidence  of  predatory  behavior.^^  The  proponents  of  entry 
and  exit  regulation  in  that  case  argued,  and  the  Board  agreed,^  that  there  is  a 
public  interest  in  "continuity  of  service"  which  requires  some  entry  and  exit 
regulation.  We  question  this  re.  ult,  in  view  of  the  Administrative  Law  Judge's 
uncontroverted  finding  that  although  commuter  carriers  had  entered  and  exited 
several  New  England  markets,  there  had  been  no  significant  lapses  of  service  to 
the  public  because  of  this  turnover."'  In  light  of  these  facts,  the  "continuity  of 
.service"  which  entry  and  exit  control  brings  is  not  an  assurance  of  service  to  the 
public,  but  an  assurance  of  tenure  to  the  carrier.  Essential  public  facilities  such 
as  grocery  stores  and  i  harmacies  do  not  enjoy  this  type  of  protection  from  com- 
petition, and  we  see  no  reason  why  air  carriers  should. 

Pricing 

The  Department  of  Justice  has  been  very  selective  in  participating  in  fare  pro- 
ceedings at  the  Civil  Aeronautics  Board,,  because  the  economics  of  the  industry 
change  rapidly  enough  to  seriously  limit  the  future  applicability  of  many  deci- 
sions as  to  specific  fare  levels.  As  a  result,  participation  in  complex  proceedings 
on  specific  fares  may  produce  considerably  less  important  benefits  than  one  would 
expect  from  the  same  expenditure  of  effort  in  a  structural  proceeding.  The 
Department  did  participate  in  the  Board's  recent  Dome.stic  Passenger  Fare  Inves- 
tigation (DPFI),  however,  because  we  believed  the  Board's  decisions  in  that  pro- 


=1  American  Airlines,  Inc.-Pan  American  World  Airways,  Inc.  Route  Exchange  Agree- 
ment,  docket   26245    (pending). 

22.\pplication  of  Pan  American  World  Airways,  Inc.  and  Trans  World  Airlines,  Inc.  for 
Approval  of  an  Agreement,  docket  27114,  et  al. 

23  See  American-Western  Merger  Case,  exhibit  DJ-RT-1,  supra,  pp.  6-10. 

=*  See  sources  cited  in  A.  Kahn,  The  Economics  of  Regulation,  pp.  219-20. 

^  Initial  Decision  of  Administrative  Law  Judge  Greer  M.  Murphy,  docket  22973,  July  9, 

ig?.-?.  p.  75. 

2«  Order  74-7-70,  July  17,  1974  ;  p.  15. 

"  Initial  Decision,  New  England  Service  Investigation,  supra,  p.  75. 


52 

ceeding  not  only  would  bring  important  revisions  in  the  level  and  structure 
of  all  domestic  airline  fares,  but  would  set  the  rules  under  which  that  level  and 
structure  would  be  set  for  many  years  to  come.  Largely  on  the  basis  of  compre- 
hensive evidence  produced  by  the  Department  of  Transportation,  we  became 
convinced  that  airlines  would  be  more  efficient  and  less  likely  to  engage  in  waste- 
ful service  competition — flying  empty  seats  and  piano  bars — if  the  Board  en- 
couraged them  to  compete  on  the  basis  of  price,  instead  of  preventing  them  from 
doing  so  by  fixing  one  fare  which  all  carriers  must  charge. 

The  key  point  here  is  that  the  economic  characteristics  of  the  airline  industry 
are  such  that  even  when  the  government  eliminates  price  competition,  carriers 
still  have  the  incentive  to  compete,  and  will  compete  any  way  they  can,  if  only 
through  "frills"  which  are  less  important  to  passengers  than  price.  Once  a  flight 
is  scheduled,  the  cost  of  carrying  additional  passengers  in  the  airplane  is  very 
low  compared  to  the  cost  of  flying  the  airplane  in  the  first  place.  Thus,  the  mar- 
ginal passenger  on  a  flight  is  very  profitable — any  competitive  initiative  which 
diverts  passengers  onto  an  airline's  flight  may  pay  off  richly. 

In  scheduled  service,  it  appears  that  next  to  price,  the  variable  most  important 
to  the  passenger  on  a  scheduled  airline  flight  is  the  ability  to  find  a  .seat  on  a 
flight  at  or  near  his  preferred  departure  time.  Consequently,  when  the  price  is 
fixed,  competitive  rivalry  is  diverted  into  capacity  competition — competing  car- 
riers offer  large  numbers  of  flights  in  an  attempt  to  cover  as  many  preferred 
departure  times  and  attract  as  many  customers  as  possible.  The  evidence  in  the 
recent  capacity  agreements  case  is  quite  convincing  that,  even  under  the  present 
system  of  uniform  fares,  carriers  do  not  have  the  incentive  to  offer  ruinous 
amounts  of  capacity  simply  because  of  this  phenomenon.  But  it  is  clear  that  fare 
regulation  has  caused  the  airlines  to  oft"er  the  consumer  large  numbers  of  flights 
and  empty  seats  instead  of  cheaper  transportation.  Stated  another  way,  they 
have  tended  to  "compete  away"  the  "monopoly  profits"  generated  by  excessively 
high  regulated  fares. 

Allowing  price  competition  by  the  airlines  would  give  them  an  incentive  to 
offer  consumers  a  choice  as  to  the  combination  of  fare  and  load  factor  they 
want,  and  all  the  evidence  is  that  the  result  would  be  that  lower  fares  would  be 
available  to  the  users  of  scheduled  interstate  flight.  The  experience  of  the  intra- 
state carriers  in  California  and  Texas  confirms  this.  Of  course,  higher  load  factors 
also  would  be  involved— but  all  this  tells  us  is  that  the  public  would  rather  pay 
considerably  less  for  travel  even  at  the  price  of  being  somewhat  less  certain  of 
getting  on  their  first  choice  of  flight.  Accordingly,  we  were  disappointed  when  the 
Board  rejected  the  arguments  of  the  Department  of  Transportation  and  Justice 
in  favor  of  allowing  air  carriers  to  price  freely  within  a  "zone  of  reasonableness" 
instead  of  requiring  a  rigid  adherence  to  one  identical  fare  for  all  carriers  offer- 
ing service  in  a  particular  market. 

We  were  gratified  that  the  Board  decided  in  phase  6  of  the  DrFI  to  base  its 
fare  decisions  upon  load  factor  and  seating  configuration  standards  which  ex- 
cluded from  the  rate  base  any  service  amenity  not  included  in  the  Board's  stand- 
ard for  such  service. 

Under  the  Phase  6  policy,  the  fare  is  based  on  the  amount  of  capacity  associ- 
ated with  a  standard  load  factor,  in  a  standard  aircraft  configuration  set  by 
the  Board,  rather  than  the  actual  load  factor  and  configuration  of  a 
particular  carrier  or  the  industry.  We  believe  this  approach  can  allow  carriers 
greater  freedom  to  experiment  with  different  levels  of  capacity  and  types  of 
service  without  being  deprived  of  the  motive  to  keep  their  services  as  economical 
as  possible.  In  Phase  6  and  the  related  coach  lounge  proceeding,^^  we  argued 
that  the  Board  violated  the  spirit  of  its  Phase  6  policy  by  attempting  to  punish 
a  carrier  offering  a  different  type  of  service  by  requiring  that  carrier  to  charge 
a  different  fare,  rather  than  simply  requiring  that  carrier  to  charge  a  fare 
based  upon  the  more  economical  aircraft  configuration  which  the  Board  adopted 
as  its  standard.  This  was  the  first  proceeding  in  recent  years  in  which  we 
carried  our  disagreement  with  the  Board  to  the  Court  of  Appeals,  and  this 
matter  is  now  pending  rehearing  en  banc  on  the  Board's  motion  after  a  decision 
favorable  to  our  position. 

We  also  have  pending  in  the  Court  of  Appeals  a  review  of  the  Board's 
decision  to  extend  rate  regulation  to  the  charter  field  for  the  first  time,  despite 
numerous  arguments  in  opposition. 


2"  ChicaKo-Los  Angeles  F.ire  Hednction  Case,  docket  25r-,H7,  now  pending  action  b.v  the 
court  of  appeals  as  Continental  Airlines,  Inc.  v.  Civil  Aeronautics  Board,  D.C.  Cir.  Nos. 
73-1714,  73-1718. 


53 

Competitive  Restraints 

it  dP<^i<i^''f  ^  generally  has  applied  a  specific  "rule  of  reason"  standard  when 
It  decider  whether  or  liot  to  approve  an  agieement  which  restrains  competition. 
tftU\  .  '*"  agreemeut  would  have  substantial  anticompetitive  effects  under 
established  antitrust  principles,  it  will  not  be  approveu  unless  approval  is  the 
only  nay  to  meet  a  serious  transportation  need  or  secure  important  public  bene- 
nts.-  Until  very  recently,  the  Department  of  Justice  has  not  participated  in  very 
many  proceedings  concerning  air  carrier  conduct  subject  to  regulation  by  the 
Civil  Aeronautics  Board.  In  recent  years,  we  have  opposed  capacity  restraint 
agreements  which  have  been  in  effect  in  several  markets  on  the  basis  of  various 
purported  jusufications.  The  capacity  agreement  question,  too,  is  pending  in  the 
Court  of  Appeals. 

The  capacity  reduction  agreement  case,  in  which  we  participated  in  a  lengthy 
hearing  at  the  Civil  Aeronautics  Board  last  year,  dealt  with  several  issues  of 
general  competitive  significance,  and  we  believe  the  record  of  that  proceeding 
casts  further  doubt  on  the  need  for  the  existing  type  of  economic  regulation  in 
air  transi)oration.  Specifically,  proponents  of  capacity  agreements  were  able  in 
that  proceeuing  to  proauce  virtually  no  evidence  that  carriers  which  flood  the 
market  with  schedules  tend  to  attract  a  greater  proportion  of  passengers  from 
their  competitors,  so  that  even  under  the  present  fixed  price-no-entry  conditions 
of  the  regulated  air  transport  industry,  carriers  do  not  really  have  economic 
incentives  to  engage  in  ruinous  overschedaling. 

The  evidence  established  instead  that  overcapacity  and  misallocation  of  ca- 
pacity in  the  regulated  air  transportation  system  can  be  traced  to  economic 
regulation  actions  by  the  Board,  primarily  the  prescription  of  noncompetitive 
fares  which  allow  breakeven  operations  at  low  load  factors,  and  a  record  of 
"bailing  out"  carriers  which  make  improvident  competitive  decisions. 

The  capacity  case  was  unusual  in  that  the  Administrative  Law  Judge  ordered 
some  very  informative  discovery  into  the  decisionmaking  process  of  the  air  carrier 
proponents  of  capacity  restraint  agreements.  One  fact  that  emerged  was  that  if 
the  Board  were  to  strictly  enforce  its  Phase  6  load  factor  standards,  air  carrier 
management  would  reduce  the  level  of  excess  capacity  in  the  industry,  provided 
it  believed  that  the  Board  would  not  take  regulatory  action  to  protect  air  carrier 
profits  despite  their  failure  to  observe  the  load  factor  standards.^  Unfortunately, 
the  Board  has  on  occasion  acted  to  "bail  out"  individual  carriers  which  get  into 
trouble ;  the  carriers  know  this,  and  they  act  accordingly.  Thus,  even  an  enlight- 
ened and  potentially  effective  regulatory  policy  such  as  the  Board's  load  factor 
standard  can  be  impaired  or  negated  by  the  regulator's  natural  and  perhaps 
inevitable  proclivity  to  protect  the  firms  it  regulates. 

The  capacity  agreement  case  also  illustrates  another  generic  problem  with 
economic  regulation :  these  anticompetitive  agreements  were  instituted  not  in 
markets  where  any  economic  problem  existed,  but  in  the  largest,  more  profitable 
markets  of  the  largest  air  carriers.^^  Such  anticompetitive  restraints  were  neces- 
sary, argued  the  Board's  Bureau  of  Operating  Rights,  in  order  to  produce  higher 
than  normal  profits,  in  some  markets,  profits  which  in  theory  could  be  used  to 
cross-subsidize  markets  in  which  average  profits  could  not  be  obtained.'^ 

Arguments  that  the  Civil  Aeronautics  Board  should  effect  a  sub  rosa  tax  upon 
one  class  of  consumers  for  the  benefit  of  another  illustrate,  we  believe,  the  un- 
fortunate results  of  giving  an  economic  regulatory  agency  quite  comprehensive 
powers,  and  only  the  vaguest  statutory  directives  as  to  how  those  powers  are  to  be 
exercised.  The  legislation  which  set  up  o^r  present  system  of  economic  regula- 
tion of  air  carriers  did  not  at  any  point  direct  the  Board  to  tax  some  consumers 
for  the  benefit  of  others,  but  it  did  provide  the  Board  with  the  tools  to  do  so 
and  with  a  set  of  conflicting,  vaguely  worded  objectives,  one  of  which  always 
could  be  selected  to  justify  such  anticompetitive  actions. 
Antitrust  Immunity 

Under  the  present  Federal  Aviation  Act,  the  Board  has  power  to  approve  or 
disapprove  mergers  (Sec.  408),  control  relationships  (Sec.  409),  and  agreements 


=9  Local  Cart^ffe  Ajrrepment  Ca^e  15  CAB  8.50  (lft.52>  ;  North  Atlnntic  Tourist  Com- 
mission Case,  Ifi  CAB  225,  226  (1952)  ;  Six  Carrier  Mutual  Aid  Pact,  29  CAB  158  (1959). 
The  Siinreme  Court  has  confirmed  the  annronriateness  of  nn  irientlcal  st-'ndnrd  in 
Fderal  Maritime  Commi/tnion  v.  fivenxka  Amerika  Linien.  ,390  TT.S.  2.'?8,  244.  246  (1967). 

sofnnncitv  Rpdnction  Apreement  Case,  docket  2290S  exhihit  D.T-A  and  testimony  of 
Rindnll   Mali".   tra"scrint  486-94  :   see  also  tran.scrint  2579.  1410-11. 

31  Docket  2290S.  Brief  of  the  TTnl+ed  Stntes  Department  of  .Tustice  to  the  Administrative 
Lnw  ,Tm1ee.  no.  18-2.3  ;  Replv  Brief,  np.  10-14. 

^Docket  22908,  Brief  of  the  Bureau  of  Operating  Rights  to  the  .Administrative  Law 
Judge. 


54 

among  air  carriers  (Sec.  412).  Section  414  of  the  Federal  Aviation  Act  provides 
that  the  antitrust  laws  shall  not  apply  to  persons  affected  by  CAB  orders  issued 
under  these  three  sections  of  the  Act,  to  the  extent  "necessary  to  enable  such 
person  to  do  anything  authorized,  approved,  or  required  by  such  order."  (49  U.b.C. 
1384)  The  public  interest  would  be  better  served  if  each  of  the  three  types  of 
transactions  as  to  which  the  Board  can  confer  immunity  were  evaluated  under 
the  standards  of  the  antitrust  laws,  rather  than  the  general  "public  interest" 
rubric  of  an  administrative  agency.  .   ^     ^      ^, 

If  economies  of  scale  were  more  prevalent  in  the  air  transport  industry  than 
in  the  general  economy,  and  these  economies  were  considered  more  important  than 
the  advantages  of  having  an  unconcentrated  air  transport  industry,  there  might 
be  a  basis  for  applying  agency  review  and  antitrust  immunity  with  respect  to  the 
three  areas  subject  to  the  section  414  immunity  provision.  It  is  manifest,  how- 
ever, that  such  economies  of  scale  do  not  exist,  and  there  is  no  other  evidence 
that  anticompetitive  industry  structure  or  conduct  is  any  more  in  the  public 
interest  in  the  air  transport  industry  than  in  the  economy  in  general.  Thus,  these 
types  of  transactions  should  be  subject  to  the  standards  of  antitrust  law,  not 
administrative  law. 

It  would  be  desirable  to  remove  the  antitrust  immunity  provisions  of  section 
414  even  if  these  three  types  of  transactions  remain  subject  to  administrative 
review.  This  would  insure  that  the  administrative  agency  would  not  follow  a 
less  procompetitive  standard  than  that  of  the  antitrust  laws;  the  safest  way 
to  do  this  is  to  eliminate  any  inference  that  the  Board's  approval  brings  immunity 
from  an  antitrust  lawsuit.  See,  e.g.,  United  States  v.  Philadelphia  National  Bank, 
374  U.S.  321  (1963).  The  agency  thus  would  be  free  to  apply  a  higher  standard 
of  protection  for  competition  but  not  a  lower  one.  This  is  the  approach  of  the 
Atomic  Energy  Act  of  1954  (42  U.S.C.  Sec.  2135). 

The  existence  of  the  section  414  immunity  provision  creates  the  possibility  of 
a  lowering  of  competitive  standards  not  only  in  the  regulated  air  transportation 
industry,  but  also  in  industries  not  regulated  by  the  CAB.  In  a  recent  decision, 
the  Supreme  Court  held  that  a  private  antitrust  action  against  Hughes  Tool  Co., 
a  person  engaged  in  aeronautics,  was  barred  by  the  Board's  approval  of  and 
continuing  jurisdiction  over  the  control  relationship  which  was  the  basis  of  the 
antitrust  complaint.  The  antitrust  complaint  had  centered  upon  the  approved 
transactions'  competitive  effects  in  the  commercial  aircraft  manufacturing  in- 
dustry, not  in  the  air  transportation  industry  which  is  regulated  by  the  Board. 
(Hughes  Tool  Co.  v.  Trans  World  Airlines,  Inc.,  409  U.S.  363,  366).  Thus,  the 
effect  of  the  Court's  decision  may  be  to  allow  the  Board  to  create  immunity  from 
the  antitrust  laws — presumably  applying  the  standards  of  administrative  law — 
in  industries  where  it  has  only  limited  jurisdiction  to  protect  competition,  or  no 
jurisdiction  at  all. 

If  any  special  characteristics  of  air  transportation  require  departure  from  the 
undiluted  application  of  the  antitrust  laws,  such  departure  should  be  effected  by 
a  procedure  similar  to  that  of  the  Bank  Merger  Act  of  1966.  Under  that  statute 
a  specialized  regulatory  agency  first  passes  upon  whether  a  merger  would  violate 
the  antitrust  laws,  and  whether  it  should  nevertheless  be  allowed  because  of  spe- 
cific overriding  public  benefits  which  could  not  be  obtained  by  any  other  means. 
The  transaction  is  then  subject  to  de  novo  review  by  the  United  States  in  a  Dis- 
trict Court. 

III.     CONCLUSIONS 

The  Board  has  used  its  comprehensive  powers  and  amorphous  policy  mandate 
in  part  to  promote  what  it  perceives  as  stability  and  "financially  sound  condi- 
tions" in  the  industry.  Each  regulated  air  carrier  is  confined  to  a  particular  class 
or  type  of  service  on  particular  routes.  Along  with  mergers  and  route  protection, 
the  result  has  been  an  ever  dwindling  number  of  competitors  within  each  regu- 
lated category.  There  is  abundant  evidence  that  this  protection  against  competi- 
tion has  in  itself  led  to  considerably  higher  prices  and  lower  eflBciency  than 
would  be  available  in  the  absence  of  entry  control.*" 

This  imposes  .serious  economic  costs  directly  upon  consumers  of  air  transpor- 
tation, and  indirectly  upon  the  entire  economy.  In  addition  to  these  direct  costs, 
regulation  restricts  the  freedom  of  air  carriers  to  enter  and  leave  markets  as 
market  forces  indicate,  and  instead  require  them  to  go  through  expensive,  time- 


rs See  sources  cited  in  Douglas  and  Miller,  supra  42,  54 ;  172. 


55 

consuming  and  unpredictable  legal  processes  before  engaging  in  normal  rearrange- 
ments of  tlieir  operations.  This  has  generated  waste,  inflexibility,  and  insensitivity 
to  the  desires  of  consumers.  It  also  has  kept  out  of  the  industry  many  firms  which 
could  have  made  valuable  contributions. 

The  fare  policy  of  the  CAB  appears  to  have  taken  a  turn  for  the  better  in  some 
respects  as  a  result  of  the  DPFI.  As  I  have  explained  above,  actual  enforcement 
of  the  load  factor  standards  could  bring  considerable  progress  toward  breaking 
the  declining  load  factor,  escalating  price  cycle.  Also  in  the  DPFI,  the  Board 
found  that  cross-subsidization  is  inefllcient  and  adverse  to  the  public  interest, 
and  moved  to  reduce  the  cross-subsidization  inherent  in  the  present  fare  struc- 
ture."  As  the  discussion  above  indicates,  however,  it  remains  to  be  seen  whether 
the  Board  will  follow  through  on  these  principles  and  apply  them  everywhere 
they  need  to  be  applied. 

In  the  area  of  pricing  flexibility,  there  has  been  little  change.  The  Board 
reaffirmed  in  the  DPFI  the  practice  of  pricing  on  an  industry  average  basis  so 
that  all  regulated  carriers,  regardless  of  their  relative  efficiency,  will  continue 
to  survive,  and  none  will  have  too  great  an  incentive  to  develop  a  greater  level  of 
efficiency  than  that  of  its  fellow  regulatees.  This  "cost-plus"  pricing  policy  has 
deprived  consumers  of  a  variety  of  price  and  quality  options.  Given  the  carriers' 
tendency  to  engage  in  service  competition  which  the  Act  allows  the  Board  to 
regulate  only  indirectly,  the  result  is  not  even  high  profits — just  waste. 

All  of  these  problems,  plus  the  recent  economic  downturn  and  fuel  price  crisis, 
have  led  the  Board  in  recent  years  to  move  into  one  area  it  previously  had  largely 
avoided — the  approval  and  even  promotion  of  anticompetitive  agreements  such 
as  pooling,  capacity  restraint  agreements  and  "route  swaps"  which  in  reality 
amount  to  enforceable  agreements  not  to  complete.  The  common  goal  in  each  of 
these  recent  agreements  has  been  to  decrease  or  at  least  stabilize  competition  and 
increase  the  rate  of  return  in  the  industry.  The  result,  in  many  instances,  has  been 
a  serious  decline  in  the  quality  of  service  coupled  with  a  dramatic  increase  in 
prices  over  and  above  increases  required  by  costs  such  as  the  increased  cost  of 
fuel. 

What  can  be  done  about  this?  The  Department  of  Justice  and  other  litigants 
sometimes  can  help  maintain  a  degree  of  reliance  on  competition,  but  under  no  cir- 
cumstances do  we  believe  such  litigation  brings  optimum  results.  Parties  seeking 
to  infiuence  the  Civil  Aeronautics  Board  toward  more  competitive  policies  are 
hampered  by  the  vagueness  and  inclusiveness  of  the  statutory  standards  among 
which  the  Board  may  choose  to  justify  its  decisions,  and  are  hamjiered  by  judicial 
re-straint  in  reviewing  crucial  aspects  of  agency  decisionmaking.  This  is  exacer- 
bated by  the  very  serious  costs  and  delays  of  litigating  economic  issues,  both 
before  the  lioard  and  in  the  courts. 

These  problems  will  be  dealt  with  in  greater  detail  in  later  sessions  of  these 
hearings.  It  will  suffice  to  say  now  that  we  do  not  believe  the  serious  problems 
of  air  transport  economic  regmation  will  be  satisfactorily  corrected  by  litigation 
under  present  statutory  standards,  although  such  litigation  can  help  somewhat. 

Neither  do  we  believe  that  the  optimum  answer  lies  in  the  reform  of  procedures 
under  which  air  carrier  economic  regulation  is  carried  out.  Unnecessary  regula- 
tions is  still  expensive  even  if  carried  out  under  clear  standards  and  optimum 
procedures.  It  would  be  possible  to  have  a  much  narrower  statute  seeking  spe- 
cific goals  with  definite  safeguards  for  competition  and  economic  efficiency.  In 
air  transportation,  the  fundamental  goal  would  be  the  provision  of  efficient  air 
transportation  to  the  public  by  qualified  tommon  carriers  using  safe  planes  and 
qualified  crews.  A  tightly  drawn  statute  would  prevent  the  Board  from  limiting 
competition  unless  it  made  findings  on  the  record  that  competition  would  com- 
promise safety  or  reliability  of  service.  Even  under  such  a  statute,  the  problem 
of  preventing  regulation  from  pursuing  other,  anticompetitive  goals  might  prove 
difficult. 

Specifically,  we  believe  that  new  legislation  should  move  toward  the  following 
goals.  First,  entry  and  exit  restrictions  should  be  greatly  liberalized.  Second,  rate 
flexibility  should  be  introduced  through  a  phased  process,  perhaps  initially  using 
a  zone  of  reasonableness.  Regulatory  intrusion  with  regard  to  rates  within  that 
zone  would  not  be  permitted.  Finally,  existing  antitrust  immunities  should  be 
removed,  along  the  lines  suggested  earlier  in  this  statement. 

There  is  a  broad  consensus  that  reform  must  proceed  along  all  three  of  *^hese 
fronts.  The  Administration  has  thus  concluded  that  it  would  be  appropriate  to 


Order  74-3-82,  p.  72  (March  18,  1974). 


56 

move  toward  much  more  reliance  upon  competition  in  the  air  transportation  in- 
dustry, and  much  less  reliance  upon  government  economic  regulation.  We  expect 
to  present  specific  legislative  proposals  within  a  short  time  to  the  Congress,  and 
specifically  to  this  Committee. 

Senator  Kennedy.  Mr.  James  Miller,  currently  senior  staff  econ- 
omist for  the  Council  of  Economic  Advisers,  received  his  Ph.  D.  from 
the  University  of  Virginia  in  economics,  formerly  served  on  the  senior 
staff  for  the  Republican  Party  from  1969  to  1972.  In  1973-74  he  was 
an  assistant  associate  professor,  now  on  leave;  he  edited  a  number  of 
books,  including  economic  regulation  of  domestic  air  transport.  We 
also  received  a  statement  from  his  coauthor,  Mr.  George  Douglas 
which  we  will  make  a  part  of  the  record. 

[The  prepared  statement  of  George  Douglas,  professor  of  economics. 
University  of  Texas,  is  included  at  the  end  of  the  testimony  of  this 
day  (February  6,  1975),  p.  437,  below.] 

STATEMENT  OF  MR.  JAMES  MILLER,  SENIOR  STAFF  ECONOMIST, 
COUNCIL   OF   ECONOMIC   ADVISERS 

Mr.  Miller.  Thank  you. 

Mr.  Chairman,  we  have  a  prepared  statement  that  I  ask  be  inserted 
into  the  record.  Mr.  Seevers  is  unable  to  be  here  and  sends  his  regrets. 
As  you  know,  today  the  Joint  Economic  Committee  is  hearing  testi- 
mony by  the  full  Council  on  the  economic  report. 

Senator  Kennedy.  That  is  where  I  am  supposed  to  be,  too. 

Mr.  Miller.  In  our  testimony  we  deal  basically  with  three  issues. 
The  first  is  the  cost  of  airline  regulation.  The  second  is  the  efficiency 
of  a  hypothetical  totallj^  deregulated  market.  Finally,  we  outline,  as 
Messrs.  Barnum  and  Kauper  did,  the  kinds  of  proposals  the  admini- 
stration is  presently  discussing  in  formulating  a  legislative  package. 

On  several  occasions  this  morning,  questions  have  arisen  about  as- 
pects of  less  regulated  or  totally  deregulated  markets  that  many  people 
question.  We  deal  with  several  of  these  in  the  testimony.  I  would  like 
to  briefly  respond  here. 

SAFETY    AND    COMPETITION 

First,  on  the  question  of  safety,  the  Federal  Aviation  Administra- 
tion is  the  governmental  instrumentality  charged  with  regulation  of 
safety  in  the  airlines.  On  the  basis  of  theory  and  evidence,  there  is 
a  lot  of  question  the  allegation  that  economic  regulation  is  needed  to 
assure  safety  of  operations.  As  mentioned  in  the  testimony,  we  per- 
formed such  a  test  on  data  and  found  that  while  the  results  were 
statistically  insignificant,  meaning  that  regulation  had  no  effect  on 
safety,  the  nature  of  the  result  actualy  give  an  appearance  of  a  positive 
relationship  between  air  fatality  rates  and  the  airlines'  rate  of  return 
on  investment. 

I  agree  that  in  formulating  any  kind  of  regulatory  reform  measure 
one  should  be  very  cognizant  of  the  safety  issue,  but  I  do  not  believe 
economic  regulation  is  the  appropriate  means  of  assuring  air  safety. 


^      57 

SMALL-TOWN   SERVICE    (CROSS-SUBSIDY) 

Second,  with  respect  to  question  of  small  communities'  losing  air 
service  because  of  regulatory  reform,  this  first  presumes  that  there  is 
a  lot  of  cross-subsidy  going  on.  The  work  I  accomplished  with  my 
coauthor,  George  Douglas,  indicates  that  the  amount  of  cross-subsidy 
is  grossly  overstated.  Professor  George  Iliads  who  is  scheduled  to 
testify  later,  will  probably  have  some  additional  remarks  on  this  issue. 
We  have  also  observed  that  commuter  airlines  have  replaced  trunk  and 
local  service  carriers  quite  successfully.  We  have  no  reason  to  believe 
that  with  less  regulation  their  effectiveness  would  be  diminished. 

RELATIONSHIP    BETWEEN    FARE    AND    ROUTE    ENTRY    FLEXIBILITY 

The  question  of  pricing  flexibility  hinges  very  much  on  the  question 
of  entry.  On  the  low  side,  as  long  as  entry  is  relatively  free,  the  carrier 
which  is  trying  to  predatorily  jDrice  one  of  its  competitors  out  of  the 
market  stands  nothing  to  gain,  because  as  soon  as  it  runs  the  last  one 
out,  it  has  to  confront  the  possibility  of  a  new  entry.  On  the  high  side, 
it  is  again  important  that  entry  be  relatively  free.  A  carrier  wishing 
to  charge  excessively  high  fares  would  be  restrained  from  doing  so  be- 
cause of  the  threat  of  entry. 

On  fly-by-night  operators,  even  if  you  had  less  economic  regulation, 
you  would  still  have  the  constraints  of  safety  regulation.  This  would 
mean  that  such  operators  would  have  to  meet  safety  standards.  They 
might  by  fly-by-night  in  the  sense  of  going  in  the  market  and  leaving 
the  market  in  a  very  short  period  of  time,  but  I  do  not  see  what  real 
damage  that  would  do  to  the  consumer. 

Senator  Kennedy.  I  suppose  the  damage  to  the  consumer  is  unre- 
liability. Here  is  one  carrier  in  the  market  one  day  making  his  reser- 
vations and  plans,  and  the  carrier  is  out  of  the  market  the  next. 

Mr.  Miller.  Senator,  I  do  not  think  we  should  underestimate  the 
value  of  a  reputation  in  something  like  tliis.  The  carrier  which  is  new 
to  the  market  will  be  viewed  skeptically.  It  is  through  trustworthy 
service  that  a  carrier  generates  new  traffic. 

NEED    FOR    LEGISLATION 

I  would  like  to  make  a  final  remark  about  the  issue  of  CAB  discre- 
tion. I  think  it  is  true  that  the  CAB  could  promulgate  many  of  the 
reforms  that  we  have  talked  about  this  morning  through  the  existing 
statute.  However,  I  do  not  think  it  will  do  so,  and  I  think  the  evidence 
of  regulation  in  the  past  is  a  very  forceful  argument  to  make  us 
skeptical  about  their  being  willing  to  move  forward  with  this  kind  of 
reform  in  the  future. 

Senator  Kennedy.  AVhy  is  that? 

Mr.  Miller.  I  think  incentives  the  regulator  faces  are  not  generally 
consistent  with  economic  efficiency.  I  think  the  statute  itself — for 
example,  the  declaration  of  policy,  section  102 — is  drawn  in  such  a  way 
as  to  give  emphasis  to  a  lot  of  different  conflicting  objectives.  A  regula- 
tor who  does  not  want  to  be  concerned  with  efficiency  can  find  an  eas}'^ 
excuse  for  not  doing  so. 


58 

Also,  as  a  matter  of  procedure,  even  if  you  had  a  compromising 
Civil  Aeronautics  Board,  five  economists  whose  sole  objective  was 
to  maximize  economic  efficiency,  to  the  extent  they  would  be  changing 
precedent  and  moving  in  very  new  directions,  I  would  imagine  there 
would  be  a  significant  protest  of  such  activity.  I  am  not  an  expert  on 
law,  but  I  am  not  confident  this  kind  of  activity  would  survive  court 
tests. 

Senator  Kennedy.  Let  me  just  ask  you  from  the  point  of  view  of 
the  Council  whether  you  feel  from  that  vantage  point  that  the  idea  of 
greater  competition  in  terms  of  rates  and  entry  would  be  beneficial 
from  an  overall  economic  point  of  view  for  our  economy  or  from  the 
consumer  point  of  view. 

Mr.  Miller.  I  think  it  is  the  major  objective  of  the  Council  to  rec- 
ommend policies  or  present  analyses  which  focus  on  economic  efficiency 
questions  as  they  pertain  to  regulation  and  other  types  of  governmental 
controls.  This,  of  course,  counts  the  consumer  to  a  very  large  measure. 
After  all.  Senator,  the  ultimate  objective  of  production  is  consumption. 

Senator  Kennedy.  Could  you  develop  your  thoughts  briefly  on  the 
question  of  cross-subsidization.  Then  secondly,  it  is  really  an  unrelated 
question,  with  this  proliferation  of  new  airlines  and  different  prices, 
how  will  the  consumer  know  w^here  to  go  to  get  a  ticket,  will  we  have 
mass  confusion  or  do  you  think  this  is  a  manageable  problem  Would 
you  talk  on  those  two  questions  ? 

CHAOS 

Mr.  Miller,  I  will  be  glad  to.  Let  me  take  the  latter  first.  Informa- 
tion is  a  scarce  resource,  and  when  consumers  know  a  producer  charges 
a  specific  rate,  and  these  rates  are  not  likely  to  be  changed,  the  pro- 
ducer's reputation  is  enhanced.  Consumers  find  out  this  information; 
producers  advertise  as  well.  In  a  freely  competitive  airline  market, 
consumers  would  learn  the  prices  that  are  charged  and  the  carriers  that 
provide  good  service — the  same  way  as  in  existing  competitive,  un- 
regulated markets. 

CROSS-SUBSIDY     (SMALL    TOWN    SERVICE) 

NoAv,  on  the  question  of  cross-subsidy,  we  essentially  model  the  air- 
lines in  the  following  way  :  Because  there  is  a  lot  of  competition  today^ — 
most  markets  are  served  by  two  or  more  carriers — the  Board  is  really 
in  the  business  of  setting  the  quality  of  service.  They  set  the  price  and 
carriers  compete  on  the  frequency  of  schedules  and  other  means  so 
as  to  bring  the  cost  level  up  to  the  price  level.  For  example,  transcon- 
tinental markets  were  referred  to  a  few  minutes  ago  where  the  prices 
are  such  that  carriere  can  break  even  at  40  to  45  percent  load  factors. 
Carriers  do,  in  fact,  schedule  up  to  the  point  where  they  are  breaking 
even  at  those  load  factors.  If  the  Board  lowered  the  price,  then  the 
carriers'  break  even  point  would  be  higher.  They  would  restrict  sched- 
uling. This  would  drive  up  load  factors.  So  in  these  markets  the 
carriers  are  earning  neither  excess  profit  nor  losses. 

On  short-haul  markets  where  the  fare  taper  is  such  that  the  price — 
vis-a-vis  the  cost  of  a  constant  load  factor  service — is  too  low,  the  car- 
riers simply  cut  back  on  scheduling  and  provide  fairly  poor  service. 


Again,  in  these  markets  the  carriers  tend  to  earn  neither  excess  profits 
nor  losses. 

So  our  general  conclusion,  based  on  this  and  additional  information, 
is  that  there  is  not  much  cross-subsidy  actually  taking  place. 

Senator  Kennedy.  Very  fine.  Thank  you  very  much. 

[The  prepared  statement  submitted  by  Mr.  Miller  for  himself  and 
Mr.  Seevers  follows :] 

Prepared  Statement  of  Gary  L.  Seevers,  Member,  Council  of  Economic 
Advisers  and  James  C.  Milleik,  Senior  Staff  Economist 

Economic  Effects  of  Regulation  of  the  Domestic  Air  Carriers  by  the  CAB 

Mr.  Chairman,  members  of  the  Committee :  We  are  pleased  to  appear  before  you 
today  to  discuss  the  economic  effects  of  regulation  of  the  domestic  air  carriers  by 
the  U.S.  Civil  Aeronautics  Board. 

For  a  number  of  years  the  Council  has  questioned  the  efficacy  of  airline  regula- 
tion and  suggested  certain  reforms.  As  a  matter  of  fact,  our  most  recent  eco- 
nomic report,*  published  just  two  days  ago,  contains  a  section  which  discusses 
airline  regulation  and  which  implies  that  certain  reforms  are  needed.  A  copy  of 
that  section  of  the  report  is  attached  as  an  appendix  to  this  testimony. 

In  the  remainder  of  this  testimony  we  outline  what  we  consider  to  be  the 
major  costs  of  CAB  regulation,  we  examine  the  economic  performance  of  a 
hypothetical  deregulated  air  carrier  market,  and  we  indicate  the  kinds  of 
regulatory  reforms  the  Administration  now  has  under  review. 

The  Costs  of  Airline  Regulation 

As  they  pertain  to  the  airlines,  economic  conditions  today  are  very  much 
different  from  what  they  were  in  1938,  when  airline  regulation  was  established. 
At  that  time,  the  U.S.  Government  was  attempting  to  promote  an  "infant"  in- 
dustry through  an  inefficient  system  of  airmail  subsidy.  Basically,  the  Govern- 
ment granted  contracts  to  air  carriers  and  prevented  competition  on  those 
routes  where  contracts  were  granted.  Recognizing  the  potential  for  excess  profits 
on  passenger  services  then  or  in  the  future,  carriers  would  "buy-in"  on  these 
contracts  for  extremely  low  rates.^  This  perfectly  rational  economic  behavior  on 
the  part  of  the  air  carrier  firms  was  then  cited  as  evidence  of  "destructive 
competition"  in  the  airline  industry  and  thus  a  need  for  governmental  interven- 
tion to  "rationalize"  competition."  It  was  also  said  that  governmental  controls 
were  needed  to  assure  safety  of  operations. 

Today,  the  domestic  airline  industry  is  no  longer  an  infant  industry  in  need 
of  promotion ;  having  increased  in  size  since  1938  some  250-fold,  by  most  stand- 
ards it  is  now  truly  "mature".  Mail  contracts  are  no  longer  the  vehicle  for  sub- 
sidy, and  as  a  percent  of  total  domestic  revenue  subsidy  has  declined  from 
31.6  percent  in  1939  to  less  than  1  percent  today.  Except  for  minor  payments  to 
Northeast  Airlines  in  the  mid-1960's,  the  trunk  carriers  have  been  completely 
off  subsidy  since  1959."  Air  safety,  which  until  1958  was  a  primary  CAB  con- 
cern, is  now  vested  with  the  Federal  Aviation  Administration  of  the  Department 
of  Transportation  (DOT)." 

Another  important  change  in  the  nature  of  the  industry  and  its  regulation  is 
that  the  principal  city-pair  markets  today  are  served  by  two  or  more  airlines.^ 


*  Economic  Report  of  the  President,  Washington,  GPO,  February  4,  1975. 

'  See  Richard  E.  Caves,  Air  Transport  and  Its  Regulators  :  An  Industry  Study.  Cam- 
brldpe.  Harvard  I'niversity  I'ress,  1962,  p.  124. 

-  Note  that  the  lesi.slative  "Declaration  of  Policy"  admonishes  the  Board  to  create 
"Competition  [only?]  to  the  extent  necessary  to  assure  the  sound  development  of  an  air- 
transportation  system  .  .  ."  [OrlRlnal  (1938)  language  now  contained  as  section  ia2(d) 
of  the  Federal  Aviation  Act  of  1958,  as  amended.] 

''  For  a  discussion  of  the  existing  subsidy  mechanism  and  its  deficiencies,  see  George  C. 
Ends,  The  Local  Service  Airlines  Experiment,  Washington,  The  Brookings  Institution, 
1972. 

*  Responsibility  for  investigating  air  accidents  was  transferred  from  the  CAB  to  the 
National  Transportation  Safetv  Board  in  igoO. 

■5  Note  that  from  1955  to  1971  the  percentage  of  total  revenue  pa.ssenger  miles  attributed 
to  markets  where  2  or  more  carriers  eacli  accounted  for  at  least  10  percent  of  the  market 
rose  from  55.6  percent  to  76.6  percent.  Sec,  George  W.  Douglas  and  James  C.  Miller  III, 
Economic  Regulation  of  Domrxtic  Air  Transiiort:  Theory  and  Policy,  Washington,  The 
Brooklnga  Institution,  1974,  p.  114. 


60 

Thus,  in  addition  to  no  longer  regulating  so  as  to  promote  an  infant  industry 
and  no  longer  regulating  air  safety,  the  Board  finds  itself  no  longer  preoccupied 
with  regulating  monopoly.  Instead,  its  primary  activity  is  regulating  comi)etition. 
But  under  CAB  regulation  this  competition  is  of  a  rather  special  sort :  It  is  mani- 
fest almost  totally  in  dimensions  other  than  price. 

A  potential  price-cutter  in  a  CAB-regulated  market  faces  significant  costs  in 
carrying  out  such  an  initiative.  First,  the  carrier  must  announce  the  new  rate  at 
least  30  days  in  advance,  thereby  alerting  its  competition  to  the  intended  action.' 
Second,  there  is  the  simple  cost  of  publishing  the  new  tariff  with  the  Board,  as 
legally  required.  Third,  any  fare  decrease  is  likely  to  be  protested  by  competitors 
as  being  unreasonably  low,  discriminatory,  preferential,  prejudicial,  or  simply 
an  instance  of  "unfair  competition."  Thus,  the  price-cutter  nearly  always  must 
make  an  affirmative  case  before  the  Board  that  the  new  rate  is  justified,  and 
this,  of  course,  costs  money. 

The  new  rate  may  be  rejected  outright  or  set  down  for  investigation.  If  it  is 
rejected,  then  of  course  any  advertising  by  the  carrier  about  the  prospective 
lower  rates  is  lost,  and  perhaps  on  balance  creates  ill  will  because  the  carrier 
is  unable  to  deliver.  If  the  rate  is  suspended,  the  carrier  may  either  withdraw 
the  initiative  or  pursue  it  further.  If  the  rate  reduction  is  pursued,  then  signifi- 
cant procedural  costs  must  be  absorbed  by  the  initiating  carrier  as  the  rate 
travels  through  various  steps :  prehearing  conference,  hearing,  briefs  to  the 
Administrative  Law  Judge,  possibly  briefs  to  the  full  Board,  oral  argument,  and 
possibly,  in  the  end,  even  court  challenges. 

Because  of  these  impediments,  one  observes  little  price  competition  in  the  air- 
lines. When  rates  are  lowered  they  are  usually  done  so  in  the  interest  of  the 
whole  industry,  as  for  example,  introducing  discount  fares  to  enlarge  total  rev- 
enues and  to  make  the  airlines  more  effective  in  competing  with  other  modes  of 
common-carrier  transportation,  such  as  intercity  buses.  Another  ramification 
of  this  constraint  system  is  that  from  the  standpoint  of  an  individual  airline 
it  makes  little  sense  to  change  the  rate  in  just  one  market.  In  an  attempt  to 
"spread  the  cost,"  airlines  which  propose  rate  reductions  usually  do  so  on  fairly 
large  chunks  of  traffic,  although  such  a  strategy  inevitably  reduces  the  likeli- 
hood of  ultimate  approval  by  the  Board  and  of  course  raises  litigation  costs. 

The  Board's  statutory  authority  to  control  price  and  its  procedures  for  imple- 
menting that  control  thus  have  rendered  price  competition  in  the  airlines  all  but 
non-existent.  On  the  other  hand,  there  are  other  means  that  carriers  have  for 
attracting  and  competing  for  passengers  over  which  the  Board  exercises  little 
or  no  direct  control.  Such  non-price  competition  takes  various  forms,  including 
costlier  meals,  "free"  drinks,  expensive  advertising,  flashy  interior  and  exterior 
color  schemes,  "VIP"  airport  lounges,  on-board  lounges,  pianos,  bars,  and  the 
like.  But  much  more  important,  in  terms  of  its  ultimate  cost  to  the  consumer, 
is  the  scheduling  form  of  non-price  competition.  As  will  be  discussed  below, 
scheduling  additional  flights  is  the  most  effective  means  that  individual  carriers 
have  of  attracting  additional  pas.sengers.  Notably,  except  for  its  power  to  grant 
antitrust  immunity  and  to  orchestrate  capacity  agreements  among  carriers,  the 
Board  is  prohibited  from  controlling  schedule  competition. '^ 

For  any  price  that  is  approved  or,  in  essence,  "set"  by  the  Board,  the  market 
has  a  "break-even"  load  factor,  which  we  define  so  as  to  include  a  normal  return 
on  investment.*  If  actual  load  factors  are  below  the  break-even  level,  the  carriers 
will  be  earning  less  than  a  normal  profit,  or  even  accounting  los.ses  and  will  cut 
back  on  capacity.  Since  market  demand  is  inelastic  with  respect  to  capacity,* 
load  factors  will  rise,  and  the  process  of  capacity  curtailment  will  continue 
until  actual  load  factors  have  risen  to  the  break-even  level,  at  which  point  the 
incentive  to  reduce  capacity  unilaterally  will  disappear."  On  the  other  hand,  if 
actual  load  factors  exceed  the  break-even  level,  individual  airlines  have  profit 
incentives  to  increase  capacity.  Actual  load  factors  will  fall  and  the  process  will 


s  Thus,  there  is  no  such  thing  as  a  conventional  "sale"  in  the  airline  business. 

''Section  401(e)(4)  of  the  Federal  Aviation  Act  states  that,  "No  term,  condition,  or 
limitation  of  a  certificate  shall  restrict  the  right  of  an  air  carrier  to  add  or  change 
schedules  ..." 

8  "Load  factor"  is  the  proportion  of  seats  filled,  usually  expressed  as  a  percentage. 

8  That  is,  the  percentage  change  in  total  traffic  in  the  market  is  less  than  the  percentage 
change  in  the  marl^et's  total  capacity. 

1°  Short  of  the  break-even  load  factor  an  individual  carrier  can  safety  assume  that  It 
reduces  capacity  its  competitors  will  also.  However,  once  equilibrium  has  been  renched, 
a  carrier  reducing  capacity  unilaterally  may  not  assume  that  its  competitors  will  do 
likewise. 


61 


continue  until  capacity  increases  have  reduced  actual  load  factors  to  break-even, 
at  which  point  there  is  no  more  incentive  to  add  to  capacity .^^ 

An  extremely  important  aspect  of  this  non-price  competition  is  that  there 
is  a  whole  range  of  prices  which  the  Board  may  choose  and  still  enable  com- 
petitive returns  to  the  individual  carriers,  or  at  least  to  the  carriers  as  a  group. 
If  the  Board  chooses  a  "high"  price,  the  break-even  load  factor  will  be  "low" 
and,  in  equilibrium,  so  will  be  the  actual  load  factor.  If  the  Board  chooses  a 
"low"  price,  the  break-even  load  factor  will  be  "high"  and,  in  equilibrium,  so 
will  the  actual  load  factor.  The  nature  of  this  trade-off  between  fare  and  average 
load  factor  is  displayed  in  figure  1." 


ATenge  Load  Tiaetor  (Psreent) 


(l)reak-«vea) 


100 


Figure  1 
(For  iUustratlon  purposes  ooly;  not  drava  to  sealv. ) 


"  When  market  load  factors  are  above  break-even,  an  individual  carrier  can  make 
more  profit  by  expanding  its  own  capacity  provided  other  carriers  do  not  also  expand  their 
capacity.  The  evidence  suggests  that  cnrriers  act  as  though  they  make  such  an  assumption. 
A  variant  explanation  of  observed  behavior  is  that  since  an  individual  carrier  may  not 
assume  that  its  competitors  will  not  increase  their  capacity  it  must  increase  its  capacity 
just  to  maintain  its  market  share.  In  any  event,  when  the  break-even  load  factor  is  reached, 
there  is  no  incentive  to  increase  capacity,  since  the  market  load  factor  will  fall  below 
break-even  and  each  carrier  may  assume  that  its  competitors  will  follow  a  policy  of 
restraint. 

For  a  more  thorough  description  of  this  nonprlce-competing  behavior  and  evidence  on 
same,  see  Douglas  and  Miller,  ibid.,  chapter  4  and  the  papers  cited  therein  by  De  Vany, 
Douglas,  Miller,  Straszheim,  Yance,  Barnekov,  Eads,  Milward,  and  White.  For  an  em- 
pirical analysis  of  the  relationship  between  market  shares  and  capacity  shares,  see  James  C. 
Miller  III,  "Airline  Market  Shares  vs.  Capacity  Shares  and  the  Possibility  of  Loss 
Kquilibria"  (processed,  1974)  and  CAB  Docket  22908  (Capacity  Reduction  Agreements 
Casel   DOT-T-1  through  ,5   (1974). 

^-  Notably,  the  Board  would  appear  to  have  accepted  this  model  of  regulated-carrier 
behnvior.  In  a  decision  in  its  recent  domestic  passenger  fare  investigation  (CAB  Docket 
21866),  the  Board  said  : 

"We  find  .  .  .  that  the  higlier  the  fare  level  in  relation  to  cost,  the  more  capacity  carriers 
will  offer  and  the  lower  load  factors  will  be  :  and,  conversely,  the  lower  the  fare  level,  the 
less  capacity  carriers  will  operate  and  the  higher  load  factors  will  be."  [CAB  Order  71- 
4-54  (April  9,  19710,  p.  23.] 


62 

Over  a  fairly  wide  range  of  prices,  carriers,  in  equilibrium,  will  earn  normal 
profits — and  thus,  arguably,  the  choice  of  price  is  not  material  to  them.  How- 
ever, the  passenger's  cost  of  service  is  greatly  dependent  upon  the  price  and  load 
factor  option  chosen  by  the  Board.  In  esssence,  the  passenger's  "full  cost" 
of  travel  is  the  ticket  price  plus  the  "cost"  of  delays  he,  or  she,  incurs  in  waiting 
for  a  flight.  We  see  in  figure  1  the  rather  obvious  proposition  that  as  the  average 
load  factor  rises  the  associated  break-even  fare  falls.  If  this  were  the  only 
element  in  the  passenger's  cost  of  service,  public  policy  would  dictate  a  fare 
consistent  with  load  factors  of  near  100  percent.  However,  as  load  factor  falls 
delay  cost  increases.  Passengers  find  it  more  diificult  to  secure  accommodations 
on  the  desired  departure  and  flights  are  fewer,  with  more  time  in  between 
departures.  When  translated  into  money  terms  this  delay  cost  is  as  characterized 
in  figure  1.  The  passenger's  full  cost  of  service  is  thus  the  sum  of  these  two 
types  of  cost,  i.e.,  ticket  price  plus  delay,  and,  given  these  two  curves,  for  some 
average  load  factor  level  the  "full  cost"  is  at  a  minimum,  i.e.,  ALF. 

A  recent  Brookings  publication  by  Professors  Douglas  and  Miller  came  to  the 
conclusion  that  the  Board  has  chosen  too  low  a  load  factor  standard,  i.e.,  55  per- 
cent as  opposed  to  60-65  percent,  and  consequently  is  promulgating  fares  which 
are  too  high."  This  means  that  the  typical  passenger  is  paying  an  "excess  fare" 
which  exceeds  the  value  of  the  reduction  in  delay.  This  in  turn  means  a  higher 
full  cost  of  service  with  no  offsetting  higher  profits  to  carrier.  Thus,  there  is  regu- 
lation-induced excess  capacity  which  represents  a  deadweight  loss  to  society." 
Douglas  and  Miller  estimate  that  during  1969  air  passengers  paid  excess  fares  to 
domestic  trunk  carriers  ranging  between  $366  million  and  $538  million,  for 
which  they  received  quality  improvements  valued  at  between  $118  million  and 
$182  million.  This  leaves  a  deadweight  welfare  loss  in  trunkline  service  for  1969 
of  between  $248  million  and  $356  million.'^ 

Since  1969  the  Board  has  established  target  load  factors  of  55  percent  as 
opposed  to  the  then-prevailing  levels  of  approximately  50  percent.  However,  the 
recent  increases  in  fuel  prices  have  raised  the  optimal  average  load  factor  to 
approximately  65-70  percent,  so  the  present  configuration  of  service  is  still 
characterized  by  efficiency  costs  on  the  same  order  of  magnitude.  Based  on  total 
domestic  trunk  revenues  of  $9,316  million  for  the  year  ending  September  1973, 
this  implies  a  current  annual  welfare  cost  for  trunk  service  ranging  between 
$355  million  and  $509  million. 

There  are  additional  costs  of  airline  regulation.  First,  there  is  evidence  that 
the  relationship  between  the  Board  and  the  industry  has  resulted  in  a  level,  and 
structure,  of  fares  which  maximizes  total  capacity  rather  than  one  which  maxi- 
mizes total  passenger  traffic."  This  is  illustrated  in  figure  2."  Since  some  costs  are 
"external"  to  the  airlines  and  their  passengers,  this  behavior  has  quite  likely 
resulted  in  excessive  investments  in  airport  and  airway  facilities  as  well  as 
excessive  consumption  of  fuel. 

Second,  the  Board's  policy  of  protecting  existing  carriers  from  competition  by 
preventing  the  entry  of  new  carriers  ^*  not  only  means  that  the  public  has  been  de- 
nied lower  price-quality  options,  but  that  potentially  more  efficient  carriers  have 
not  been  able  to  test  the  efficiency  of  existing  carriers.  Whether  new  carriers 
would  have  significantly  lower  costs  is  subject  to  considerable  debate,  but  evi- 
dence on  relative  carrier  costs  and  the  evidence  from  unregulated  markets  cer- 
tainly raises  this  possibility.^*  There  are  two  significant  problems  with  this  ap- 
proach, however.  First,  a  regulator  is  inherently  less  capable  of  administering 
resources  "correctly"  than  is  an  individual  competitive  entrepreneur.  The  regu- 


"  In  the  DPFI  the  Board  announced  its  intention  of  in  effect  setting  fares  at  levels 
which  would  cover  costs  (plus  a  reasonable  return  on  investment)  on  the  basis  of  an 
industry-wide  average  load  factor  of  55  percent. 

i*The  analysis  only  briefly  summarized  here  can  be  found  in  Douglas  and  Miller,  ibid., 
chapter  6. 

'5  Miller  and  Douglas,  ibid.,  p.  172. 

i«  See  Arthur  S.  De  Vanv,  "Effects  of  Price  and  Entry  Regulation  on  Airline  Output, 
Capacity  and  Efficiency,"  Bell  Journal  of  Economics  and  Management  Science,  (forth- 
coming Spring  1975;  and  Douglas  and  .Miller,  ibid.,  pp.  60  and  176-77. 

"Rather  than  choosing  fare  level  F*,  the  Board  has  chosen  fare  level  F**.  Figure  2  is 
adapted  from  De  Vany,  ibid. 

18  Since  regulation  w.ns  established  in  1938.  not  a  single  new  trunk  carrier  has  entered 
the  market,  and  not  a  single  trunk  has  exited  the  market  except  through  merger. 

19  See  Robert  J.  Gordon,  ".\irline  Costs  and  Managerial  Efficiency"  in  Transportation 
Economics  :  .\  Conference,  Columbia  Universitv  Press  for  the  National  Bureau  of  Economic 
Research,  1965,  pp.  61-94  ;  Theodore  E.  Keeler,  "Airline  Regulation  and  Market  I'erform- 
ance,"  Bell  Journal  of  Economics  and  Management  Science,  Autumn  1972,  pp.  ,'?99-424  ; 
William  A.  Jordan,  Airline  Regulation  in  America  :  Effects  and  Imperfections,  Bnltimore, 
The  Johns  Hopkins  Press,  1970,  chapter  11  ;  and  Douglas  and  Miller,  ibid.,  pp.  141-9. 


63 


Aure  Linrel 


Figure  2 
(Tar  illttstratioD  porpoaet  ooJor;  aot  drawn  to  scale. ) 

lator  neither  has  information  as  good  as  that  of  the  entrepreneur  nor  does  he, 
or  she,  have  the  appropriate  incentives.  Second,  in  terms  of  fact  versus  theory, 
the  performance  of  the  existing  regulatory  agencies  causes  one  to  be  extremely 
skeptical  of  achieving  good  industry  performance  by  relying  upon  regulation. 


ECONOMIC   EFFICIENCY   OF   DEREGULATED    MARKETS 

Costs  of  regulation  such  as  those  described  above  implicitly  assume  some 
alternative,  usually  and  ideally,  efficient  markets.  In  real  life,  critics  of  regula- 
tion must  be  careful  to  identify  realistic  alternatives.  Two  such  alternatives  im- 
mediately come  to  mind:  (a)  "enlightened"  regulation,  and  (b)  total  deregula- 
tion. On  the  one  hand,  it  is  entirely  possible  that  a  truly  enlightened  regulator 
could  eliminate  most  of  the  costs  described  above.  For  example,  in  an  ideal  set- 
ting the  CAB  could  adopt  target  load  factors  by  market  characteristic  and  ac- 
cordingly, by  regulating  fares,  eliminate  the  costs  of  "excess  capacity." 

At  the  other  extreme  is  the  hypothetical,  completely  deregulated,  competitive 
market.^  The  theoretical  argument  for  the  eflBciency  of  deregulated  airline  mar- 
kets is  extremely  powerful.  The  airline  industry  appears  to  conform  closely  to 
the  necessary  conditions  for  price  competition :  no  significant  scale  economies,^ 
fairly  elastic  or  firm  demand,  relative  difficulty  of  coordinating  pricing  and  output 
policies  i.e.,  collusion,  and,  in  the  absence  of  controls,  relative  ease  of  entry  and 
exit. 


=0  For  this  di-scussion,  by  the  term  "deregulation"  and  its  derivatives  we  mean  the  elimi- 
nation of  economic  regulation  only,   not  the  elimination  of  s-^fety  regulation. 

^  On  the  question  of  scale  economies  see  Douglas  and  Miller,  ibid.,  pp.  13-18  and  the 
sources  cited  therein. 


64 

Finally,  there  are  numerous  regulator-imposed  constraints  on  routings  and 
service  requirements  which  serve  to  raise  costs."'  To  our  knowledge  a  precise  esti- 
mate of  all  these  costs  has  not  been  made.  In  our  judgment  this  figure  would  be 
in  the  neighborhood  of  $1  billion  per  year,  or  around  10  percent  of  total  domestic 
trunkline  revenues.-^ 

Looking  at  the  question  of  optimal  price  and  load  factor,  with  fare  flexibility, 
a  carrier  would  have  an  alternative  means  of  attracting  additional  passengers : 
lowering  price.  The  carrier  could  then  judge  the  most  effective  way  of  attracting 
business :  lowering  price  or  providing  more  service.  The  result  would  be  the  ap- 
propriate market  combination  of  price  and  quality.  Moreover,  in  some  markets 
there  may  well  be  a  distribution  of  price  and  quality  combinations  that  is  de- 
sired by  the  public.-*  Free  markets  provide  incentives  for  this  configuration  to 
come  about. 

Under  conditions  of  free  entry  and  free  exit,  firms  would  have  to  stand  a  more 
substantive  "market  test"  of  their  efliciency.  More  efficient  firms  would  survive, 
and  inefficient  firms  would  be  forced  to  exit.  The  removal  of  restrictions  on  rout- 
ings w^ould  result  in  lower  costs  to  consumers,  and  uneconomical  markets  would 
be  abandoned.  There  might  well  be  some  "market  imperfections,"  -°  but  in  eco- 
nomic efficiency  terms  these  would  probably  be  fairly  minor. 

Of  course,  we  would  like  to  rely  upon  facts  concerning  deregulated  markets  as 
well  as  upon  theory.  Unfortunately,  we  do  not  have  ideal  tests  of  deregulation 
since  the  CAB  has  preempted  truly  comparable  experiments.  However,  we  do 
have  two  deregulated  markets  that  are  similar  in  many  respects  to  CAB-regulated 
markets,  except,  of  course,  for  differences  in  the  degree  of  regulation. 

First,  we  have  the  intrastate  markets,  which  are  outside  CAB  jurisdiction. 
Prior  to  1965,  the  California  Public  Utilities  Commission  regulated  maximum 
prices  in  intrastate  air  service,  but  not  entry  and  exit.""  Professor  William  A. 
Jordan  has  made  an  extensive  study  of  the  history  and  economic  character  of 
this  market  and  has  concluded  that  in  virtually  all  respects  the  California  intra- 
state airline  market  is  much  more  efficient  than  comparable  interstate  CAB- 
regulated  markets."  Even  today,  with  tighter  regulation,  fares  in  California  intra- 
state markets  average  much  less  than  fares  in  comparable  interstate  markets. 

A  similar  result  was  obtained  in  the  Texas  intrastate  market,  where  Southwest 
Airlines,  a  carrier  licensed  by  the  Texas  Aeronautics  Commission,  is  in  compe- 
tition with  BranifE  Airways,  a  CAB-regulated  trunk  carrier,  and  Texas  Inter- 
national Airways,  a  CAB-regulated  local  service  carrier.  Despite  having  its 
service  introduction  postponed  nearly  four  years  because  of  judicial  challenges  by 
Braniff  and  Texas  International,  the  carrier  is  now  serving  the  "golden  triangle" 
(Dallas,  Austin,  and  Houston)  at  a  profit,  charging  fares  which  average  some 
20  to  50  percent  less  than  comparable  CAB-regulated  fares. 

The  other  major  unregulated  market  is  that  of  commuter  airlines,  previously 
known  as  air  taxis.  In  1952,  faced  with  doing  something  about  a  plethora  of 
illegal  interstate  air  taxi  operations,  the  Board  simply  exempted  from  regulation  ^ 
any  interstate  air  carrier  which  utilized  aircraft  having  no  more  than  12,500 
pounds  gross  take-off  weight.^  At  that  time  it  was  thought  that  no  operator  could 
provide  profitable  scheduled  operations  with  such  small  aircraft.  Subsequently, 
however,  technology  changed,  and  equipment  of  this  w^eight  is  now  capable  of 
carrying  up  to  19  passengers  at  reasonable  comfort  and  speed  and  at  relatively 
low  cost.  Today  there  are  literally  hundreds  of  such  operators  which  provide 
regularly-scheduled  service  to  low-density  markets — and  in  some  higher-density 


22  Some  of  these  have  been  instituted  to  assure  service  to  points  that  the  Incumbent 
carrier  might  not  ordinarily  serve.  To  some  extent,  then,  such  costs  are  revealing  of  the 
resource  costs  of  pursuing  certain  social  "non-economic"  objectives. 

23  Note  that  these  losses  are  not  simply  transfers  from  consumers  to  producers  or  from 
consumers  to  consumers.   They  represent  the  economic  cost  of  squandered  resources. 

2*  For  example,  a  low  load  factor,  low-density,  high-amenity,  high-priced  service  cater- 
ing to  business  travelers,  and  a  low-cost,  no-frills  service  catering  to  the  vacation  traveler. 
At  present  such  specialization  is  limited — another  cost  of  regulation. 

25  These  include:  (a)  collusion  over  prices  and/or  service,  (b)  quasi-monopoly  service  in 
marginal  niarlvcts.  and  (c)  inefficient  mixes  of  aircraft  and  frequencies.  On  the  latter 
point,  see  George  W.  Douglas,  "Equilibrium  in  a  Deregulated  Air  Transport  Market,"  paper 
delivered  at  a  seminar  on  Problems  of  Regulation  and  Public  Utilities,  Dartmouth  College, 
1972.  processed. 

2«  Since  then  control  over  entry  and  exit  has  been  instituted. 

2'  .Jordan,  ibid.  Also  see  Bureau  of  Accounts  and  Statistics.  "Traffic,  Fares,  and  Competi- 
tion :  Los  Angeles-San  Francisco  Air  Travel  Corridor",  Washington,  U.S.  Civil  Aero- 
nautics Board,  1965. 

28  Under  section  416(b)  of  the  Federal  Aviation  Act. 

29  That  standard  was  recently  changed  to  a  30-passenger  capacity  and  a  net  payload  of 
no  more  than  7,500  pounds. 


65 

markets,  often  in  direct  competition  with  trunk  and  local  service  carriers  Since 
with  tew  exceptions  these  carriers  receive  no  government  subsidy,  and  since  they 
are  handieappeu  in  terms  of  tiie  size  of  the  aircraft  they  may  operate  they  tend 
to  serve  marginal,  or  uncertain  routes;  thus,  their  turnover  is  judged  by  some  as 
being  fairly  high.  However,  it  is  notable  that  such  unregulated  carriers  serve 
many  markets  that  CAB-reguiated  carriers  have  chosen  to  abandon  and  that 
tneir  service,  given  their  equipment  and  the  characteristics  of  their  markets,  is 
sate  and  reliable. 

By  no  means  has  the  brief  discussion  touched  on  all  the  characteristics  of 
deregulated  markets.  In  the  space  remaining,  however,  we  should  like  to  respond 
to  the  more  signiticant  criticisms  raised  by  those  who  oppose  less  regulation  of 
the  domestic  air  transport  system  : 

1.  Without  regulation,  flights  would  be  unsafe.  Critics  of  deregulation  argue 
that  regulation  is  needed  to  insulate  carriers  from  market  forces;  otherwise  the 
"dog-eat-dog '  atmosphere  of  free  comi^etition  would  lead  carriers  to  skimp  on 
safety,  to  the  public's  detriment.  There  are  several  answers  to  this;  First,  the 
governmental  instrumentality  charged  with  air  safety  is  the  FAA,  not  the  CAB. 
Deregulation,  as  we  have  defined  it,  would  leave  the  FAA's  role  unaffected. 
Second,  there  is  little  direct  evidence  that  economic  regulation  has  had  any 
effect  on  air  safety.  For  example,  the  Board  has  never  withdrawn  or  suspended 
the  certificate  of  a  trunk  operator  on  grounds  that  its  operations  were  unsafe, 
and  its  constraints  on  entry  have  seldom  if  ever  revolved  around  issues  of  safety. 
One  variant  of  the  safety  hypothesis  is  that  high  profits  mean  safe  operations. 
However,  when  we  tested  this  naive  proposition  over  the  period  1939  to  1953, 
for  which  there  appeared  to  be  adequate  variations  in  profit  rates  and  fatality 
rates  to  make  a  test  feasible,  we  found  the  result  contrary  to  what  critics  of 
deregulation  would  have  predicted.  While  the  net  effect  was  small  and  statisically 
not  meaningful,  the  result  actually  showed  a  positive  relationship  between  in- 
dustry profit  rates  and  industry  fatality  rates.^ 

2.  Under  deregulation  there  would  be  wholesale  abandonment  of  markets,  leav- 
ing only  the  "top-25"  (or  top-50  or  top-100)  markets  with  adequate  service.  This 
prediction  is  based,  in  essence,  upon  the  assumption  that  CAB  regulation  pres- 
ently constraints  the  abandonment  of  hundred  of  markets.  In  particular,  it  is 
argued  that  the  present  pricing  structure  enables  a  considerable  amount  of  cross- 
subsidy  whereby  a  carrier  uses  the  excess  profits  from  some  markets  to  offset 
losses  in  others  that  presumably  would  not  receive  service  under  deregulated 
conditions.  Miller  and  Douglas  have  found  that  the  extent  of  this  cross-subsidy 
is  greatly  overstated,^  and  apparently  the  Board  agrees.^^  If  this  is  true  then 
presumably  most  alleged  "losing"  markets  are  in  fact  self-supporting  and  would 
not  be  abandoned  if  regulation  were  terminated.  Second,  even  if  one  carrier  aban- 
dons a  market,  this  is  not  to  say  that  some  other  carrier  could  not  serve  it  at  a 
profit.^  Third,  there  may  be  points  which  would  be  abandoned  if  carriers  were 
restrained  to  the  CAB-regulated  fare,  but  free  to  charge  a  higher  fare  if  need  be, 
carriers  could  serve  many  such  markets  at  a  profit.  There  are  numerous  cases 
where  trunks  or  local  service  carriers  have  abandoned  markets  that  were  later 
served  by  commuter  carriers  at  a  profit,  often  a  slightly  higher  price  and  a  more 
frequent  service  configuration. 

3.  Under  deregulation,  only  a  handful  of  carriers  would  survive.  This  could 
happen,  but  if  it  did  such  industry  concentration  would  not  be  a  problem.  Since 
there  are  no  pervasive  .scale  economies,  there  is  little  reason  to  anticipate  this 
outcome  any  more  than  one  might  anticipate  the  emergence  of  several  hundred 
operators.  However,  even  if  only  a  handful  of  carriers  did  survive,  the  ease  of 
entry  into  deregulated  markets  would  act  to  "police"  the  market  and  thus  pre- 
vent any  abuses  of  monopoly  power. 

4.  Under  deregulation,  prices  and  schedules  would  be  unstable.  Without  doubt 
deregulation  fares  would  be  less  stable  than  at  present.  After  all,  regulation  has 
virtually  precluded  price  competition.  However,  rates  would  not  fluctuate  broadly. 
The  reason  is  that  information  is  a  scarce  resource  and  carriers  can  reduce  this 
expense  and  thus  attract  passengers  by  keeping  such  rates  relatively  stable.  The 


^'The  result  was  as  follows:  Domestic  fatality  rate  (pa.ssenper  fatalities  per  100 
million  miles  flown)  =1.76+ (.009X<lomestic  industry  profit  rate).  (T-statistic  on  variable 
coeffloient  =  .2.5  :  equation  R==.OS.)  Data  sources:  T^.S.  Tivil  Aeronautics  Board.  Handhook 
of  Airline  f^tafirticfi:  1971  Edition.  Washington.  GPO,  1972.  p.  554  ;  and  Caves,  ibid.,  p.  S9^. 

31  Miller  and  Dousrlas.  ibid.,  chapter  fi.  „        ,, 

32  See  C\B  Order  74-3-S2.  March  18.  1974.  pp.  66-72.  Moreover,  the  Board  has  recently 
enunciated  a  nolicv  of  eliminating  anv  cross-subsidy.  (Ibid.,  p.  68.) 

33  Perhaps  the  replacement  carrier  is  more  efficient,  or  the  point  is  more  complementary 
to  Its  route  system. 


51-146   O  -  76 


same  is  true  of  schedules.  An  unregulated  carrier  stands  to  gain  considerable  ill 
will  by  not  keeping  schedules,  or,  put  another  way,  an  unregulated  carrier  may 
gain  a  good  reputation  by  maintaining  published  schedules.  Certainly  the  ex- 
perience of  the  intrastate  airlines  and  the  commuter  airlines  is  inconsistent 
with  the  prediction  of  unstable  rates  and  schedules  under  deregulated  condi- 
tions.^ 

APPROACHES   TO   REGULATORY   REFORM 

From  the  prior  discussion,  it  should  be  apparent  that  the  economic  perform- 
ance of  the  domestic  airline  industry  would  be  significantly  enhanced  if  economic 
regulation  were  liberalized  or  perhaps  eliminated.  ISince  one  cannot  predict  with 
absolute  certainty  what  would  happen  with  complete  deregulation,  it  may  not  be 
feasible  to  make  a  total  commitment  to  such  a  course  of  action  at  this  time.  For- 
tunately, there  is  an  approach  which  appears  feasible,  which  leaves  open  the 
question  of  ultimate  total  deregulation,  and  which  we  would  highly  recommend. 
That  is,  we  should  move  smartly  in  the  direction  of  more  liberal  regulation  ;  at  the 
same  time  we  will  gain  additional  information  about  the  efficiency  of  total  de- 
regulation and  can  make  incremental  decisions  as  needed.  Such  a  regulatory  re- 
form proposal  would  be  consonant  with  the  following  principles  : 

1.  Entry.  It  should  be  easier  for  existing  carriers  to  enter  new  markets  and  for 
new  carriers  to  enter  the  business.  At  a  minimum,  the  Board  should  consider  the 
effects  on  economic  efficiency  of  prospective  new  service  when  deciding  entry 
cases.  Also,  it  would  be  desirable  to  prohibit  the  Board  from  constraining  entry 
on  the  grounds  that  it  might  adversely  affect  other  carriers. 

2.  Exit.  Cairriers  should  be  allowed  to  abandon  markets  where  they  cannot 
cover  costs.  Otherwise,  implicit  taxes  on  other  travellers  have  to  support  such 
services  and  this  is  not  only  questionable  as  a  matter  of  equity,  but  it  tends  to 
hide  the  real  cost  of  serving  these  markets. 

3.  Rates.  Fares  should  be  flexible  so  as  to  allow  price  competition.  One  ap- 
proach would  be  to  institute  a  "zone  of  reasonableness,"  such  as  plus  or  minus 
15  percent  of  existing  fares,  within  which  fares  would  be  totally  exempt  from 
regulation.^  Retaining  control  over  maximum  and  minimum  fares  thus  guards 
against  the  possibility  of  monopolistic  exploitation  on  the  high  side  and  alleged 
"cut-throat"  competition  on  the  low  side.  Over  time  the  zone  could  be  widened 
to  allow  for  even  more  price  competition,  lower  fares,  and  further  differentiation 
in  price-quality  offerings. 

4.  Antitrust  immunity.  In  order  to  assure  that  the  basic  thrust  toward  less 
regulation  were  not  perverted,  it  would  be  necessary  to  limit  the  Board's  power 
to  grant  antitrust  immunity.  Such  a  change  would  affect  such  things  as  agree- 
ments over  fares,  pooling  of  revenues,  agreements  to  control  capacity,  et  cetera. 
Not  affected  would  be  innocuous  relationships  such  as  baggage  interchange,  joint 
reservation  facilities,  and  the  like. 

5.  Subsidy.  During  an  interim  period,  it  might  well  be  desirable  to  retain  the 
Board's  subsidy  program.  However,  we  would  suggest  that  the  whole  subsidy 
mechanism  be  reexamined  in  order  to  determine  ways  of  obtaining  more  results 
from  each  subsidy  dollar,  or,  alternatively,  of  reducing  the  subsidy  bill  for  any 
given  results. 

Legislative  proposals  for  regulatory  reform  reflecting  these  principles  are  now 
being  considered  by  the  Administration.  It  is  anticipated  that  the  Administration 
will  recommend  to  this  session  of  Congress  a  comprehensive  program  which,  if 
enacted,  would  significantly  increase  the  efficiency  of  our  air  transportation  sys- 
tem and  provide  consumers  with  improved  transportation  services  at  lower  costs. 


^  See.  for  example,  Jordan,  ibid.,  chapters  5-10. 

35  It  is  important  that  this  zone  be  wide  enough  to  allow  for  meaningful  price  com- 
petition. Also,  too  narrow  a  zone  would  facilitate  price  collusion.  Fifteen  percent,  plus 
and  minus,  would  appear  to  be  a  minimal  standard. 


AIR  TRAVEL 
(From  Economic  Report  of  the  President,  1975,  G.P.O.,  pp.  154-5) 

In  the  domestic  airline  industry,  regulation  has  reserved  primarily  to  bring 
about  a  nonoptimal  choice  of  price  and  quality.  Because  the  CAB  had  a 
fairly  liberal  policy  during  the  1950's  and  1960's  toward  the  entry  of  existing 
carriers  into  city -pair  markets,  the  principal  markets  are  now  served  by  two 
or  more  airlines.  However,  since  their  fares  are  regulated  by  the  CAB,  the 
airlines  tend  to  complete  on  the  basis  of  scheduling,  over  which  the  Board 
does  not  exercise  direct  control.  The  result  is  "excess  capacity,"  and  efforts 
to  raise  the  regulated  fares  in  order  to  assure  a  return  on  investment  greater 
than  the  industry's  perceived  cost  of  capital  serve  only  to  set  the  stage  for 
further  capacity  augmentation. 

Carriers  as  a  group  have  consequently  tended  to  earn  neither  excess  profits 
nor  losses,  but  the  traveling  public  has  paid  higher  fares  because  of  the 
regulation-induced  excess  capacity.  While  excess  capacity  does  yield  some 
benefit  in  the  form  of  more  frequent  departures,  less  crowding,  and  a  better 
chance  of  obtaining  a  seat  on  the  preferred  departure,  the  value  of  this  excess 
capacity  is  almost  surely  less  than  its  cost.  As  evidence,  in  the  relatively  un- 
regulated California  and  Texas  intrastate  markets  the  competitively  deter- 
mined higher-load  factor  service  has  historically  been  sold  at  prices  some  40 
percent  below  the  prices  of  comparable  interstate,  CAB-regulated  services.  More- 
over, a  recent  study  reports  that  in  1969  domestic  air  passengers  paid  "excess 
fares"  ranging  between  $366  million  and  $538  million,  for  which  they  received 
service  quality  improvements  valued  at  between  $118  and  $182  million.  The 
difference,  between  $248  million  and  $356  million,  represents  a  deadweight  loss 
to  society. 

In  its  recent  domestic  passenger  fare  investigation,  the  CAB  established 
target  load  factors  of  55  percent.  Since  the  prevailing  load  factors  were 
around  50  percent,  this  policy  had  the  effect  of  reducing  excess  capacity  and 
lowering  fares.  However,  it  would  appear  that  a  much  higher  load  factor 
standard  is  justified  especially  in  view  of  the  recent  increa.ses  in  fuel  prices. 
The  Board's  new  policy  of  encouraging  agreements  among  carriers  to  limit 
capacity  is  not  an  appropriate  way  of  dealing  with  this  problem.  In  markets 
covered  by  agreements,  the  passenger's  total  cost  of  service  is  increased  because 
of  increased  delays,  but  the  fare  is  not  reduced. 

Airline  regulation  imposes  other  costs,  which  are  not  generally  well  per- 
ceived. For  instance,  through  the  regulatory  process,  fares  have  tended  to  be 
set  at  levels  and  with  a  structure  that  maximizes  total  seat  capacity,  as  opposed 
to  maximizing  total  passenger  traffic,  the  result  being  added  congestion  and 
environmental  costs,  as  well  as  increased  costs  of  airports  and  airways.  By  re- 
stricting the  entry  of  new  firms  into  trunk  carrier  service  in  order  to  protect 
less  eflScient  incumbent  firms,  regulation  has  also  penalized  potentially  more 
eflScient  firms  and  has  resulted  in  higher  fares  for  a  given  quality  of  service. 

These  costs  of  airline  regulation  could  be  reduced  substantially  or  even 
eliminated  if  entry  into  and  exit  from  markets  were  made  easier  and  if 
control  over  fares  were  liberalized  so  as  to  encourage  price  competition.  Under 
such  circumstances  an  individual  airline  could  attract  more  passengers  by 
lowering  its  price  rather  than  increasing  its  total  capacity. 

(67) 


68 

Senator  Kennedy.  Mr.  Peck  is  our  next  witness,  a  former  member 
of  the  Council  of  Economic  Advisers. 

Then  Professor  Noll,  if  you  would  be  kind  enough— Professor  Noll 
received  his  Ph.  D.  in  1957,  was  on  the  senior  staff,  Council  of  Eco- 
nomic Advisers,  through  1973,  and  senior  fellow,  and  currently  pro- 
fessor of  economics  at  the  California  Institute  of  Technology. 

Thomas  Moore,  would  you  come  up  ?  Mr.  Moore  is  professor  of  eco- 
nomics, at  Stanford  University. 

Mr.  Peck,  do  you  want  to  start  ? 

STATEMENTS  OF  MERTON  J.  PECK,  PROFESSOR  OF  ECONOMICS, 
YALE  UNIVERSITY;  ROGER  G.  NOLL,  PROFESSOR  OF  ECONOMICS, 
CALIFORNIA  INSTITUTE  OF  TECHNOLOGY;  AND  THOMAS  G. 
MOORE,  SENIOR  FELLOW,  THE  HOOVER  INSTITUTION  ON  WAR, 
REVOLUTION,  AND  PEACE,  STANFORD  UNIVERSITY 

Mr.  Peck.  Yes,  thank  you.  Senator. 

I  have  a  short  statement  I  would  like  entered  into  the  record,  but  I 
will  not  read  it.  The  reason  is  that  the  testimony  of  the  previous  wit- 
nesses from  the  Department  of  Transportation,  Council  of  Economic 
Advisers,  the  Federal  Trade  Commission  and  the  Department  of 
Justice  have  made  many  of  my  points.  To  read  my  statement  now 
might  seem  to  be  preaching  to  the  converted.  Much  of  my  statement 
would  be  cumulative. 

I  would  like  to  indicate,  however,  that  the  economic  literature  in 
recent  years  has  made  two  points:  First,  regulation  is  economically 
inefficient ;  it  costs  the  consumer  too  much.  Second,  the  solution  to  this 
inefficiency  lies,  in  general,  in  more  competition  and  less  regulation 
to  provide  the  consumer  additional  price  and  service  options. 

Those  two  points  were  made  well,  I  think,  by  the  preceding  wit- 
nesses. Looking  at  their  footnotes,  I  discovered  an  amazing  fact.  Peo- 
ple do  read  economists'  waitings,  and  those  writings  are  reflected  in 
the  testimony  of  the  previous  witnesses. 

I  would  add  three  other  points.  First,  we  have  all  observed  that 
airplanes  fly  half  empty,  and  the  numerous  flights  reduces  waiting 
time  but  raises  costs.  A  Yale  student  of  mine,  Michael  Pustay,  has 
calculated  the  value  in  reduced  waiting  time  relative  to  the  cost  of 
more  flights.  He  found  that  in  1969  the  excess  capacity  flown,  if  waiting 
time  is  valued  at  $10  an  hour,  added  about  10  percent  to  airline  fares. 


In  transcontinental  markets,  it  added  even  more  to  the  costs.  His  results 
suggest  the  following  conclusion :  In  1969,  the  American  airlines  were 
flying  the  right  number  of  flights  for  the  $60,000-a-year  man,  to  whom 
convenience  matters  more  than  cost.  Everyone  also  was  offered  too 
many  flights  and  too  high  fares. 

Now  I  would  like  to  turn  to  another  point.  I  think  congressional 
hearings  are  a  highly  desirable  forum  in  which  to  raise  the  critical 
issue  of  regulatory  reform.  You  mentioned  earlier.  Senator,  the  regu- 
latory proceedings  themselves  as  a  way  to  change  policy.  I  have  ap- 
peared as  an  expert  witness  in  regulatory  proceedings.  I  have  been 
impressed  with  the  care  and  diligence  of  regulatory  officials  as  well 
as  their  concern  with  the  public  interest.  But  I  find  the  issues  are  too 
narrowly  drawn  to  make  regulatory  proceedings  a  good  place  in  which 
to  examine  broad  issues. 

I  would  add  one  final  point  made  in  my  statement.  I  recall  President 
Kennedy's  transportation  message  of  1962,  which  was  a  forceful  plea 
for  deregulation.  If  one  heard  only  the  firet  day  of  the  hearings  on 
that  message,  with  witnesses  all  in  favor  of  it,  one  would  conclude  de- 
regulation was  going  to  come  within  a  week  or  two.  It  turned  out  that 
the  first  day  was  not  representative,  and  the  legislation  that  accom- 
panied that  message  did  not  do  well  in  Congress. 

It  seemed  to  me  then  that  President  Kennedy's  plea  for  deregula- 
tion was  good  economics.  It  may  even  be  better  economics  today. 

Senator  Kennedy.  Professor  Noll. 

Mr.  Noll.  Senator,  we  have  engaged  in  a  little  bit  of  collusive  be- 
havior of  our  own,  and  I  think  it  would  be  more  appropriate  if  Mr. 
Moore  came  before  I  did. 

Mr.  MooRE.  Thank  you.  Senator.  I  would  like  to  summarize  my 
statement. 

My  research  and  other  research  all  on  the  question  of  regulation 
is  going  to  point  to  the  same  thing :  regulation  produces  waste,  higher 
prices,  and  often  poor  service.  My  research  has  been  in  the  area  of  ICC 
regulation,  regulation  of  trucking  in  Europe,  regulation  of  electricity 
utility  rates  by  State  Commissioners,  occupationally  sensin^i-,  and  the 
regulation  of  stock  market  margin  requirements.  I  might  indicate  my 
study  of  ICC  regulations  has  indicated  in  1968  ICC  regulations  in- 
flicted costs  on  the  American  economy  in  the  order  of  $3.8  to  $8.8 
billion.  Today  the  figure  would  be  considerably  higher 

I  would  like  to  turn  to  my  experience  in  v  estern  Europe,  which  I 
have  just  come  back  from,  studying  the  regulations  there. 


70 

I  found  that  regulation  has  the  same  pattern  there  as  it  does  here. 
In  those  countries  like  West  Germany,  they  have  very  strict  regula- 
tions, and  prices  are  much  higher,  almost  40  percent  higher,  than  in 
free  market  countries. 

England,  for  example,  has  deregulated  trucking  entirely,  and  it  il- 
lustrated an  appropriate  one  for  this  hearing  because  many  of  the 
same  points  that  you  were  raising  this  morning  and  others  raised  about 
deregulation  were  raised  about  deregulating  trucking.  Professor  Noll, 
who  has  argued  that  he  would  get  predatory  pricing  cutthroat  com- 
petition, monopolizing,  services  would  disappear  to  small  countries, 
safety  would  decline,  but  when  they  deregulated  trucking,  none  of 
these  things  happened,  prices  did  come  down,  but  profits  surprisingly 
enough  were  not  appreciably  affected.  Service  appeared  to  improve, 
their  service  to  small  communities,  even  in  northern  parts  of  Scotland, 
were  maintained,  and  in  fact  improved  under  deregulation,  and  the 
safet}^  record  also  improved.  That  was  due  partly  to  some  additional 
statutes  dealing  with  safety  and  trucking. 

So  that  none  of  these  things  that  are  alleged  to  happen  happened 
there.  There  is  no  reason  to  believe  they  would  happen  in  the  airline 
industry. 

The  second  point  that  I  want  to  make  is  that  regulation  as  a  process 
is  inherently  faulty.  There  is  nothing  that  you  could  do,  no  rewriting 
of  the  statute,  no  appointment  of  better  commissioners  is  going  to  do 
more  than  make  marginal  improvements.  The  regulatory  process  as  it 
is  developed  must  in  fact  emphasize  the  economic  liealth  of  the  in- 
dustry. The  regulators  cannot  tolerate  major  firms  failing.  Your  hear- 
ings last  fall  indicated  that  the  CAB  was  attempting  to  put  a  floor 
under  charters. 

Too,  as  your  own  report  said,  to  maintain  or  increase  the  profit- 
ability that  Pan  Am — let  me  see — had  in  order  to  help  Pan  Am  with 
its  financial  problems. 

This  is  inherent  in  regulation.  Regulation  also  by  its  very  nature  in 
a  competitive  industry  often  results  in  the  regulated  not  even  getting 
the  benefits,  because  price  competition  which  others  have  talked  about 
this  morning  has  been  eroding. 

Roger  Xoll  is  going  to  elalaorate  a  little  more  on  this  and  the  prob- 
lems with  the  regulatory  policy. 

Mr.  Noll.  Thank  you.  I,  too,  as  Professor  Peck,  have  a  written  state- 
ment that  I  do  not  intend  to  bore  you  with  in  completeness.  I  have 
given  a  corrected  version  to  professor  Breyer  which  I  hope  you  will 
put  into  tlie  record. 

Senator  Kennedy.  Yes.  It  will  be  included  in  the  record. 


71 

Mr.  Noll.  Since  this  is  in  fact  a  committee  on  administrative  prac- 
tices, I  would  like  to  focus  on  the  way  the  administrative  practices 
operate  and  what  kind  of  efficiency  effects  they  have. 

I  think,  as  judged  from  the  testimony  so  far  here  today,  economists 
and  even  lawyers  and  political  scientists  who  have  studied  regula- 
tion have  focused  too  much  of  their  attention  on  performance  of  the 
industry  and  too  little  of  their  attention  on  the  nature  of  the  process 
itself.  One  is  normally  faced  with  a  conclusion  which  says  regulation 
of  the  industry  is  costing  us  x  billion  dollars,  therefore,  let's  stop 
having  fools,  and  incompetents,  and  politicians  appointed  and  fix  the 
whole  thing  up  or  they  will  say  let's  tinker  with  the  administrative 
procedure  so  the  procedure  can  be  made  better. 

CERTAIN    COSTS    ARE    INTRINSIC    TO    REGULATION 

What  I  Avould  like  to  give  today  is  a  view  on  why  I  think  this  is 
a  mistaken  view.  I  have  known  fine  men  on  regulation  commissions 
who  came  out  after  their  term  simply  shaking  their  heads,  not  under- 
standing why  they  weren't  able  to  accomplish  all  the  things  they 
were  hoping  to  accomplish  when  they  went  in. 

The  problem  lies  in  the  institution  itself.  There  are  a  number  of 
dilemmas  in  setting  up  an  industry  to  control  market  behavior  that 
are  simply  unresolvable. 

COSTS   DUE   TO   REGULATORY   DELAYS 

It  first  arises  from  incompatability  of  decisions,  that  make  de- 
cisions with  staff,  that  individuals  are  accorded  due  process,  that 
decisions  are  based  upon  evidence,  and  that  when  someone  raises 
an  issue  in  a  proceeding  that  is  to  be  accounted  for  by  the  person 
making  the  decision. 

It  is  inconceivable  the  kinds  of  power  to  redistribute  wealth  that 
inheres  in  regulatory  institutions  would  be  delegated  to  any  bureau- 
cracy without  subjecting  the  decisions  to  judicial  review  and  without 
giving  affected  individuals  the  right  to  plead  their  cases  before 
decisionmakers. 

To  safeguard  the  rights  of  individuals  against  capricious  and  ar- 
bitrary decisions  of  an  agency  requires  establishing  decisionmaking 
procedures  that  normally  cause  decisions  on  important  issues  to  be 
protracted.  This  can  create  serious  problems  in  three  types  of  circum- 
stances, when  rapid  inflation  pushed  costs  up  and  firms  cannot  respond 
to  cost  increases  by  raising  prices  until  a  protracted  regulatory  review 
has  been  completed;  when  a  technological  development  that  would 


72 

lower  costs  and  improve  service  quality  cannot  be  fully  exploited  with- 
out regulatory  review;  and  when  an  innovative  new  firm  seeks  to 
enter  a  regulated  market  but  must  first  win  the  approval  of  the  regu- 
lators. The  last  two  effects  significantly  reduce  the  incentive  to  the 
firm  to  be  innovative,  since  to  all  the  risks  and  costs  of  innovation 
are  added  the  expense  in  time  and  resources  of  a  regulatory  proceed- 
ing, while  the  risk  of  a  more  innovative  competitor  capturing  a 
superior  market  position  is  reduced. 

COSTS  DUE  TO  NECESSARY  BIAS  TOWARD  THE  FEW  COMPANIES  MOST  AFFECTED 

The  second  major  dilemma  of  regulatory  institutions  reflects  the 
trade-off  between  an  expensive  regulatory  process  and  a  process  that 
is  insulated  from  the  individuals  affected  by  its  outcomes.  In  part  be- 
cause the  preservation  of  accountability  and  due  process  through  ju- 
dicial review  makes  participation  in  the  regulatory  process  expensive, 
and  in  part  because  the  vast  majority  of  persons  who  are  affected  by 
regulatory  decisions  are  not  effectively  organized  to  represent  them- 
selves in  regulatory  proceedings,  the  flow  of  information  and  proposed 
rules  to  the  agency  is  one-sided.  A  passive  agency  that  relies  upon  the 
evidence  supplied  by  participants  in  the  process  will  inevitably  make 
decisions  based  upon  incomplete  assessments  of  the  issues  at  hand ;  an 
agency  that  can  generate  its  own  independent  flow  of  information  on 
every  important  case  will  be  much  more  expensive  to  operate.  In  fact, 
none  of  the  Federal  regulatory  authorities  engaged  in  price  and  profit 
regulation  devotes  anywhere  near  the  resources  to  generating  informa- 
tion for  use  in  regulatory  proceedings  that  is  committed  by  the  indus- 
tries they  regulate. 

An  example  of  what  basically  happens  is  that  a  few  well  represented 
groups,  by  virtue  of  the  procedure  of  the  agency,  get  to  structure  what 
the  issue  will  be  in  the  proceeding  and  they  get  to  provide  most  of  the 
information  upon  which  the  decisions  will  be  based. 

The  outcome  is  best  illustrated  by  the  recent  debate  over  the  regula- 
tion of  cable  television. 

The  recent  debate  over  the  regulation  of  cable  television  is  an  illus- 
trative case  in  point :  The  final  regulatory  rules  were  worked  out  by  a 
coalition  of  broadcasters,  cable  system  owners  and  program  producers. 
While  each  of  these  groups  cast  their  arguments  defending  their  own 
positions  in  terms  of  the  beneficial  effects  a  system  satisfying  them 
would  have  on  society  at  large,  and  while  the  FCC  devoted  some  staff 
resources  to  investigating  the  stake  of  viewers  in  the  issue,  neverthe- 
less the  final  compromise  was  hammered  out  exclusively  by  the  well- 
represented  special  interests,  and  was  adopted  by  the  FCC  explicitly 
because  none  of  the  three  groups  would  appeal  the  compromise,  legally 
or  politically. 


73 

Senator  Kexnedy.  Professor  Breyer  is  goin^?  to  chair  this  part  of 
the  hearing.  I  hope  vou  will  continue  if  that  is  all  right. 

Mr.  Noll.  OK. 

These  endemic  problems  of  regulation  do  not  necessarily  lead  to  the 
conclusion  that  under  no  conditions  should  industry  be  regulated.  All 
they  imply  is  that  certain  inevitable  costs  are  to  be  expected.  Gener- 
ally, these  costs  will  be  higher  because  :  (1)  the  sophistication  required 
to  determine  the  true  technical  and  economic  conditions  of  the  industry 
is  greater,  (2)  the  greater  the  portion  of  the  effects  of  regulation  that 
is  diffused  over  a  large,  heterogeneous  group  that  is  unlikely  to  be  ef- 
fectively organized,  and  (3)  the  more  uncertain  and  rapidly  changing 
the  economic  environment  in  which  the  regulated  firms  operate,  such 
as  is  the  case  during  a  period  of  rapid  inflation  or  deepening  recession. 

The  cost  of  regulation  is  also  likely  to  be  greater  the  more  competi- 
tive the  regulated  industry.  This  is  because  entrenched  firms  are  to 
some  extent  protected  from  competition  by  the  slowness  and  costs  of 
procedures  that  must  be  followed  by  new  entrants  into  a  market.  In 
addition,  the  regulatory  forum  allows  competitive  firms  to  engage  in 
a  far  greater  degree  of  collusive  behavior  than  would  be  permitted  in  a 
normal  competitive  circumstance.  And  by  exercising  some  control  over 
the  information  flowing  to  the  agencies,  while  constituting  the  pri- 
mary threat  of  appeal  to  the  agency's  decision,  the  industry  can  push 
the  agency  to  make  policies  and  adopt  rules  that  enforce  cartel-like 
behavior  upon  the  firms  in  the  industry.  These  types  of  actions — the 
mutual  service  reduction  agreements  among  the  airlines  that  were 
promoted  by  the  CAB  are  good  examples — would  surely  be  antitrust 
violations  in  the  absence  of  the  protective  umbrella  of  the  regulatory 
statutes. 

The  principal  conclusion  of  the  preceding  remarks  is  rather  straight- 
forward :  one  should  keep  in  mind  the  costs  of  regulation  when  de- 
ciding whether  to  regulate  any  particular  industry,  and  whether  to 
continue  to  regulate  an  industry  that  was  subjected  to  regulation  when 
circumstances  were  far  different  from  the  present.  For  example,  if  an 
industry  becomes  increasingly  able  to  support  a  competitive  market 
structure  as  time  progresses,  the  expected  costs  of  regulation  will  in- 
crease while  the  expected  benefits  of  regulation  will  decline. 

COSTS    INCREASED    WHERE    REGULATOR — LIKE    CAB — MUST   PROMOTE 
INDUSTRY 

Presumably  the  argument  for  regulation  of  most  industries  is  more 
complex  than  simply  the  avoidance  of  monopolistic  practices.  In  the 
case  of  domestic  airlines,  regulation  has  a  certain  promotional  feature, 
owing  to  the  effects  attributed  to  an  extensive  air  route  structure  on 
economic  development,  the  distribution  of  economic  activity,  and  na- 


74 

tional  defense.  Without  debating  the  merits  of  these  contentions — 
which  are,  of  course,  eminently  debatable — the  issue  remains  which 
policy  instrument  can  most  effectively  generate  the  desired  route  struc- 
ture. The  difficulty  with  the  regulatory  approach  is  that  this  explicit 
promotional  aim  gives  the  regulatory  authority  an  even  greater  indus- 
try orientation  than  the  institutional  dilemmas  would  normally  pro- 
duce. On  the  industry's  part,  promotional,  cost-plus  regulatory  policies 
generate  overly  optimistic  investment  plans  since  the  incentive  for 
investment  is  heightened  by  the  belief  by  firms  that  regulators  will 
act  to  ameliorate  at  least  some  of  the  financial  losses  that  will  be  suf- 
fered if  an  investment  plan  proves  too  optimistic.  On  the  agency's 
part,  financial  failure  of  a  regulated  firm  is  at  best  an  embarrassment 
and  at  worst  a  serious  problem ;  the  failure  may  be  attributed  to  the 
decisions  of  the  agency,  and,  in  any  event  will,  at  least  temporarily, 
cause  the  pattern  of  service  to  fall  short  of  the  promotional  objective 
that  led  the  agency  to  acquiesce  to  overinvestment  in  the  first  place. 
The  result  is  a  continuing  spiral  of  overly  optimistic  expansions — too 
many  new  planes  flown  too  frequently  over  too  many  routes — followed 
by  policies  propounded  by  regulators  to  bail  out  their  charges. 

Deregulating  a  competitive  industry  will  undoubtedly  have  some 
significant  adjustment  effects.  Prices  and  pi'ofi^^s  Avill  probably  fall, 
dramatically  so  in  the  short  run,  some  routes  will  be  abandoned  or  be 
subjected  to  sharp  service  curtailment,  and  some  firms  may  face  bank- 
ruptcy and  reorganization.  But  in  the  long  run,  more  and  better  service 
and  normal  profits  can  be  expected,  and  at  reduced  prices,  as  firms 
learn  to  operate  more  efficiently  and  as  the  price  system  is  used  as  a 
signalling  device  for  tailoring  service  to  user  tastes. 

ALTERNATIVE  TO  REGULATION  OF  AIRLINES  :  DIRECT  8XTBSIDY  ALLOCATED  BY 
COMPETITIVE   BIDDING 

If  the  resulting  route  structure  is  judged  to  be  somehow  unsatisfac- 
tory by  the  political  process,  competitive  bidding  for  contracts  to  serve 
unprofitable  routes  or  to  fly  unprofitably  large  and  fast  aircraft  into 
some  cities  will  prove  a  far  more  efficient  mechanism  for  promoting 
the  industry  than  regulation.  The  key  to  the  contract  alternative  is 
its  reliance  on  the  natural  forces  of  competition  in  all  markets,  includ- 
ing the  subsidized  ones.  Even  if  Congress  desires  to  promote  a  more 
developed  route  structure  than  the  competitive  market  would  yield 
but  without  paying  subsidies  from  general  revenues — a  circumstance 
which  plausibly  suggests  that  a  subsidy  should  not  be  paid  in  any 


75 

event — an  explicit  intraindustry  transfer,  retaininj^  the  competitive 
market  structure,  is  still  feasible.  Subsidized  routes  could  be  jfinanced 
by  a  tax  on  airline  tickets,  for  example. 

Economists,  myself  included,  blanch  at  most  any  proposal  to 
engage  in  Government  promotion  of  an  industry,  especially  when 
financed  by  the  profitable  activities  of  the  industry.  Such  cross-sub- 
sidization extracts  its  own  costs  in  terms  of  efficiency  of  the  economic 
system,  and  these  are  not  trivial.  But  the  point  remains  that  the  econ- 
omists' arguments  for  unregulated  competitive  industry  inevitably 
penetrates  costs  but  provides  no  benefits,  except  that  in  the  short  run 
existing  firms  in  the  industry  that  have  overinvested  in  response  to 
perverse  regulatory  incentives  experience  losses  when  the  protective 
shield  of  regulation  is  removed.  The  efficient  way  to  promote  an  in- 
dustry, or  to  force  it  is  to  respond  to  considerations  not  normally  re- 
flected in  the  marketplace,  to  do  so  directly  through  taxes,  subsidies, 
and  performance  standards  tied  specifically  to  the  policy  concern  of 
the  Government. 

Mr.  Breyer.  Thank  you  very  much. 

What  we  are  trying  to  do  is  in  part  generate  a  debate,  and  I  would 
like  to  know  your  views,  and  that  will  be  helpful  to  develop  questions 
with  other  people  to  testify. 

First  of  all.  I  know  you  teach  in  this  field,  and  I  take  it  you  are  not 
experts  in  airline  regulation,  but  you  do  read  the  things  written  both 
from  the  industry  point  of  view  and  from  other  points  of  view ;  and 
you  feel  that  you  have  an  ability  to  compare  the  trucking  regulation 
with  a  whole  host  of  other  regulations. 

CONSENSUS   AMONG   ECONOMISTS 

Is  there  any  sort  of  consensus  among  economists  on  the  question  of 
air  regulations  ?  I  have  noticed  a  lot  of  economic  issues.  There  are  as 
many  views  as  political  points  of  view.  Democratic  economists  say  one 
tiling,  and  Republican  economists  say  another.  Are  people  pretty  much 
in  agreement,  or  is  it  a  political  thing  even  among  economists? 

Mr.  Peck.  I  would  think  there  is  a  general  consensus  among  econo- 
mists that  airline  regulation  is  not  economically  efficient.  I  tried  to  look 
for  defenses  by  industry  scholars  of  the  present  regulatory  processes 
by  independent  scholars  for  my  courses,  and  the  search  has  been  in 
vain. 

It  seems  to  me  there  is  an  emerging  consensus  in  economic  writings 
that  regulation  no  longer  serves  the  public  interest.  Since  there  are 


76 

25,000  economists  in  the  country,  and  we  speak  for  three,  there  is  ob- 
viously going  to  be  a  diversity  of  views,  but  less  than  other  economic 
views. 

Mr.  MooRE.  I  would  like  to  add  that  I  was  at  the  President's  eco- 
nomic summit,  and  I  put  forward  at  that  summit  a  package  of  22  steps, 
mainly  which  dealt  with  regulation,  several  of  which  dealt  with  CAB 
regulation  in  particular.  At  that  meeting  there  were  23  economists, 
many  liberal  Democrats,  many  conservative  Kepublicans,  some  of  the 
best  known  names  in  the  profession. 

Of  the  23  people  there,  21  endorsed  the  package  or  at  least  the  gen- 
eral gist  of  the  package,  which  was  antiregulation.  One  of  the  persons 
did  not  just  think  it  was  irrelevant  in  connection  with  inflation,  so  that 
gives  me  some  idea. 

Mr.  Noll.  When  I  spent  3  years  at  Brookings  I  was  codirector  of  a 
service  of  research  projects  on  regulation.  Approximately  25  projects 
were  undertaken,  the  political  complexion  of  the  researchers  varied 
from  the  extreme  right  to  the  extreme  left.  All  of  the  Federal  regula- 
tions were  studied  in  some  detail  and  particularly  the  Civil  Aero- 
nautics Board  were  studied  separately,  some  in  the  Republican  coun- 
cil of  economic  advisers  and  some  on  the  Democratic  council  of 
economic  advisers. 

They  found  out  it  was  costing  to  the  tune  of  several  billion  dollars 
a  year.  Economists  are  justifiably  often  criticized  for  failure  to  reach 
consensus  on  major  policy,  and  in  most  instances  that  is  right,  that  thoy 
are  not  people  who  do  in  fact  reach  consensus  easily. 

On  the  other  hand,  the  nice  thing  about  being  a  student  of  industrial 
organization  and  regulation  is  that  you  can  get  along  with  your  col- 
leagues, because  you  never  have  to  run  the  risk  of  being  dead  wrong 
and  saying  regiilation  has  been  foolish  in  a  particular  sector.  I  know 
of  no  major  industrial  scholarly  work  by  an  economist  or  political 
scientist  or  lawyer  in  the  last  10  years  that  reaches  the  conclusion  that 
a  particular  industry  would  operate  less  efficiently  and  less  equitably 
than  with  regulation.  The  conclusion  is  unanimous.  None  outside  of 
the  industry  organizations  themselves  seriously  contend  that  regula- 
tion is  serving  the  consumers,  or  has  a  serious,  positive  benefit. 

TRANSITION    TO    DEREGULATION 

Mr.  Breyer.  Are  the  economists,  even  with  this  consensus,  suffi- 
ciently sensitive  to  what  undoubtedly  are  very  real  problems  the  in- 
dustry has?  If  in  fact  you  had  deregulation,  isn't  there  a  risk  you 
would  end  up  putting  a  lot  of  companies  out  of  business  ?  If  they  don't 


77 

make  profits,  they  won't  be  in  business.  Is  not  there  some  kind  of  real 
risk  that  despite  consensus  in  the  classroom,  out  in  the  real  world 
deregulation  means  you  will  force  airlines  out  of  business  and  end  up 
with  significantly  worse  services  ? 

Mr.  Noll.  I  think  as  a  characterization  of  the  transition  phenome- 
non, there  is  a  lot  to  be  said  for  it.  Why  does  it  like  to  be  regulated  ? 
The  answer  is  quite  simple.  Ever  since  1938,  36  years,  almost  37  years, 
the  industry  has  made  investment  decisions,  routing  decisions,  on  the 
basis  of  the  assumptions  the  industry  will  be  regulated. 

The  excess  capacity  of  seats  is  not  magically  construed  out  of  the 
air.  So  investment  plans  are  put  forth  on  the  basis  of  the  assumption 
that  planes  will  be  flown  half  empty. 

In  the  transition  scenario  from  the  regulated  industry  to  the  un- 
regulated industry,  there  are  going  to  be  financial  difficulties  by  some 
of  the  firms,  not  by  all  of  the  firms,  in  the  industry.  Some  of  the  firms 
will  prove  better  able  to  survive  than  others.  I  would  expect  there 
would  be  bankruptcies,  or  not  bankruptcy,  but  operating  in  a  deficit. 
That  is  testimony  of  inefficiency  of  regulation.  The  reason  there  would 
be  losses  is  because  a  whole  inefficient  industry  structure  has  been 
built  upon  the  regulation  institution,  a  lot  of  decisions  have  been 
made  because  they  are  protected  by  regulation. 

Mr.  Breyer.  Are  you  saying  we  will  end  up  with  the  possibility  of 
not  having  an  airline  industry  ? 

Mr.  Noll.  I  am  not  finished  yet.  The  first  point  to  remember  is  what 
financial  failure  means.  It  means  a  lot  of  managers  will  be  put  out  of 
jobs.  The  people  who  are  now  directing  airline  companies  are  directing 
because  of  their  sophistication  in  dealing  with  regulations.  That  will 
no  longer  be  a  talent  for  which  airlines  will  pay  a  high  salary. 

Mr.  Breyer.  Are  you  saying  that  at  the  end  of  the  line  we  will  have 
an  airline  industry,  or  that  we  won't  ?  Is  there  a  big  risk  or  a  little  risk  ? 

Mr.  Noll.  Airplanes  will  be  there,  dift'erent  people  will  own  them, 
different  firms  perhaps,  different  managers  of  those  firms  will  be  in 
existence.  But  the  point  is  as  long  as  you  can  make  money  flying  peo- 
ple from  New  York  to  Los  Angeles,  there  will  be  people  and  airlines 
ready  to  do  that.  There  will  be  a  transition  when  the  ownership  and 
the  management  changes,  and  the  more  gradual  you  make  the  transi- 
tion and  the  more  you  compensate  the  people  for  the  transition,  the  less 
shaken])  there  will  be. 

Mr.  Breyer  Professor  Peck. 

Mv.  Peck.  You  have  to  distinguish  between  the  long  run  and  the 
short  run. 


78 

The  longrun  prospects  of  an  airline  industry  operating  without 
regulations  is  very  good.  It  will  be  a  good  industry. 

There  is  the  transitional  problem  which  economists  have  not  really 
addressed  as  seriously  perhaps  as  it  deserves.  It  is  partly  a  question 
of  equity,  partly  a  question  of  efficiency  of  a  special  kind  moving  to 
a  new  and  better  competitive  situation. 

The  proposals  for  tleregulation  usually  are  stated  so  that  they  allow 
for  a  transition.  One  of  the  witnesses  this  morning  said  we  would  not 
deregulate  overnight. 

But  I  think  the  transitional  problems  are  solvable  if 

Mr.  Breyer.  Down  the  road  the  airline  industry  would  be  profitable, 
eventually  ? 

Mr.  Peck.  That  is  right. 

Mr.  Breyer.  Why  are  they  so  against  this  then? 

Mr.  Peck.  I  am  reminded  of  the  remark  the  best  of  all  monopoly 
profits  is  a  quiet  life.  It  may  be  true  of  our  regulations;  people  are 
used  to  doing  business  in  a  certain  way.  They  are  also  concerned  about 
transitional  problems.  I  would  be,  too,  if  I  were  a  president  of  an 
airline. 

EVIDENCE    OF    OTHER    UNREGULATED    INDUSTRIES 

Mr.  Breyer.  You  would  ask  the  industry  what  would  happen  in 
the  long  run  ?  You  think  the  problems  could  be  overcome  ?  Is  there  any 
reason  to  believe  if  you  have  fears  of  competition,  people  won't  start 
cutting  back  in  safety  and  we  won't  have  a  lot  of  unsafe  planes  flying 
around?  Don't  you  have  to  worry  about  people  cutting  back  on  seat- 
belts  or  oxygen  masks  ? 

Mr.  Noll.  If  it  would  be  profitable  for  them  to  do  it  in  an  unregu- 
lated environment,  if  there  were  evidence  there  would  be  planes  falling 
out  of  the  skies  like  California  and  Texas. 

Mr.  Breyer.  You  mean  historically  they  are  not  regulated  to  the 
same  extent  in  California  and  Texas,  is  that  your  point  ? 

Mr.  Noll.  That  is  my  point. 

Mr.  Breyer.  They  are  regulated  from  the  point  of  view  of  safety. 

Mr.  Noll.  That  is  right. 

Mr.  Breyer.  But  they  don't  have  fare  regulations  to  the  same  extent. 

Mr.  Noll.  Yes. 

Mr.  INIoore.  British  deregulation  of  trucking,  the  same  problem  of 
transition  came  up,  and  if  you  face  the  transition  over  enough  period 
of  time  and  do  it  appropriately  you  can  minimize  it.  There  will  still 
be  these  transitional  costs,  and  that  is  Avhy  the  airline  fears  it,  but  in 
the  \on<r  run  the  industry  will  perform — — 

Mr.  Breyer.  Trucking  was  deregulated  in  England,  and  the  net  re- 
sult was  the  firms  were  just  as  profitable  ? 

Mr.  Moore.  Just  as  profitable  as  they  were  before,  and  they  were 
not  in  fact  highway  safety  improved,  and  prices  came  down. 


79 


DESTRUCTIVE    COMPETITION" 


Mr.  Breyer.  There  are  a  couple — I  am  just  g:etting  rather  quick 
answers,  I  know — but  there  are  a  couple  of  things  that  concern  me. 

People  are  generally  concerned  whether  in  an  unregulated  environ- 
ment you  would  discover  destructive  competition.  Again  and  again 
that  argument  is  made.  Is  there  any  reason  to  think  you  would  not  have 
destructive  competition,  such  tremendous  fare  competition  that  in  fact 
one  airline  ch'ives  everybody  out  of  business  or  they  all  go  under  and 
you  end  up  without  service.  What  is  the  risk  of  that  happening? 

Mr.  Noll.  That  is  an  extremely  difficult  question  to  answer  briefly. 
Here  are  a  few  kinds  of  responses  to  it.  No.  1,  it  is  not  obvious  that 
will  ever  hap])en,  historically,  in  any  industry  that  did  not  have  a  scale 
economies,  which  is  to  say  if  there  exists  an  industry  where  there  are 
no  true  economies  gained  to  being  a  monopoly,  it  is  much  cheaper  to 
merge  than  to  try  to  force  the  other  guy  to  go  bankrupt.  Historically, 
in  industries  where  unregulated  competition  has  prevailed  I  do  not 
know  of  a  single  instance  where  that  has  happened. 

Second,  in  the  unregulated  markets — or  the  markets  that  at  least 
for  a  time  were  unregulated — this  has  not  happened.  PSA  is  not  an 
airline  running  business  losses  to  the  point  of  doing  in  big  companies 
like  United. 

Another  point  is  that  antitrust  laws  do  exist,  and  one  of  the  clearest 
prohibitions  in  the  antitrust  laws  is  predatory  price  cutting,  that  is 
cutting  prices,  low  costs  to  drive  somebody  else  out  of  business  and 
then  raise  costs.  There  will  always  be  that  route. 

Finally,  in  the  case  of  the  airline  industry,  even  if  in  the  short  run 
someone  could,  if  airline  A  could  drive  airline  B  out  of  a  given  market, 
as  soon  as  the  price  went  back  up  the  airline  would  be  able  to  jump 
right  in.  Airlines  will  not  disappear  from  the  face  of  the  Earth.  There 
will  always  be  airplanes  you  can  use  to  enter  the  market  again. 

So  unless  a  price  cutter  is  to  have  his  price  be  below  cost  forever  he 
will  not  find  it  in  his  interest  to  engage  in  such  behavior. 

Mr.  MooRE.  Pan  Am  and  TWA  offer  charter  service  to  Europe  and 
have  not  driven  other  charters  out  of  business.  They  have  complained 
about  the  competition  in  these  smaller  firms. 

The  same  point  was  made  by  trucking.  There  is  no  expense  in 
England  with  predatory  pricing  and  monopoly.  It  just  does  not  occur. 

Mr.  Breyer.  I  think  that  is  fine. 

[The  prepared  statements  of  Messrs.  Peck,  Moore,  and  Noll  follow :] 

Prepared  Statement  of  Merton  J;  Peck,  Professor  of  Economics, 
Yale  University 

regulatory  reform   of  the  civil  aeronautics  board 

I  am  pleased  to  have  the  opportunity  to  appear  before  you.  My  specialty  is  the 
economics  of  regulation,  and  for  the  past  two  decades  I  have  taught  courses 


80 

and  published  on  this  subject.  In  1968  I  served  as  a  member  of  the  Council  of 
Economic  Advisers,  with  responsibility  for  regulatory  policy.  I  have  not,  how- 
ever, written  on  the  airline  industry.  My  comments  will  be  based  on  my  general 
knowledge  of  regulatory  policy. 

In  1970,  an  MIT  economist,  Paul  Maaivoy,  edited  a  book  which  he  called 
The  Crisis  of  Regulatory  Commissions.^  At  the  time  I  thought  the  title  an  un- 
seemly one,  since  the  custom  in  academia  is  for  colorless  and  somewhat  pedantic 
titles.  But  I  now  think  that  Professor  MacAvoy  was  right;  there  is  a  crisis  in 
the  regulatory  commissions. 

In  recent  years,  economists  have  been  almost  uniformly  critical  of  Federal 
regulatory  commissions.  Indeed,  I  have  sought  for  my  courses  recent  scholarly 
publications  that  find  some  good  in  present  policies.  The  search  has  been  in 
vain.  The  uncharitable  might  say  I  have  not  looked  diligently  enough,  but  it 
seems  to  me  that  there  is  an  emerging  consensus  in  economic  writings  that 
regulation  no  longer  serves  the  public  interest.  A  review  of  these  writings  leads 
me  to  make  three  points  : 

1.  Regulation  is  frequently  very  costly  to  the  American  public. 

2.  Regulation  ought,  in  general,  to  be  reduced.  We  would  be  better  off  with 
less  regulation  and  more  competition. 

3.  Congressional  hearings  on  Federal  regulatory  policies  such  as  those  initiated 
here  are  needed. 

1.  Regulation  is  generally  very  costly  to  the  American  public 

Several  recent  studies  have  shown  that  the  costs  of  regulation  in  terms  of 
economic  efficiency  are  substantial."  And  for  airlines,  we  have  all  taken  trips 
with  practically  empty  airplanes,  and  yet  airline  fares  keep  climbing. 

A  Yale  doctoral  student  of  mine,  Michael  Pustay,  has  attempted  to  quantify 
such  casual  observations.^  There  are  two  factors  which  he  recognized  in  his 
calculations.  More  flights  mean  shorter  waiting  times.  That  is  worth  something, 
and  so  Dr.  Pustay  put  a  valuation  on  reductions  in  waiting  time.  More  flights 
also  mean  higher  costs,  and  Pustay  used  the  CAB  costing  formula  to  estimate 
those  added  costs.  Pustay  applied  his  technique  to  289  city-pairs  for  1969.  For 
each  city-pair  he  used  a  model  developed  by  another  economist,  George  Douglas, 
to  establish  the  optimal  number  of  flights,  recognizing  both  the  costs  of  added 
flights  and  the  savings  in  waiting  time.  He  then  estimated  the  net  cost  of  having 
more  daily  flights  from  the  optimal  number. 

Pustay's  results  are  striking.  If  waiting  time  is  valued  at  $10.00  an  hour,  the 
added  costs  in  1969  were  $4.56  million  annually,  about  9  percent  of  airline  fares 
at  that  time.*  Of  course,  if  waiting  time  is  valued  at  more  per  hour,  then  more 
flights  become  economically  justified.  Even  at  $20.00  an  hour  the  excess  costs 
were  $273  million  annually.  Pustay's  results  suggest  that  American  airlines  in 
1969  were  flying  the  right  amount  of  flights  for  the  $60,000  a  year  man.  Everyone 
else  was  being  offered  too  many  flights  and  too  high  fares." 


1  Paul  W.  MacAvoy  (ed),  The  Crisis  of  Regulatory  Commissions.  W.  W.  Norton  Company, 
1970. 

2  Studies  for  surface  transportation  are  reviewed  in  Lee  I.  Sparling.  "Rate  Regulation 
and  Freiglit  Traffic  Allocation,  A  Review  and  Revision,"  Social  Science  Working  Paper, 
#68,  California  Institute  of  Technology,  1974.  For  a  study  of  the  costs  of  regulation  in 
television,  see  Roper  Noll.  ^Terton  J.  Peck,  and  John  J.  McGowan,  Economic  Aspects  of 
Television  Regulation  (Brookings  Institution  1973). 

^  Michael  W.  Pustay,  The  Effects  of  Regulation  on  Resource  Allocation  in  the  Domestic 
Trunk  Airline  Industry,  Yale  Doctoral  Dissertation,  1973. 

*  Ibid.,  p.  117. 

^  Note  that  Pustay's  results  are  for  over-supplied  city-pairs  ;  there  were  other  smaller 
markets  that  had  too  few  flights.  George  W.  Douglas  and  James  C.  Miller  used  a  some- 
what different  approach  and  estimated  the  costs  of  excess  capacity  in  1969  as  ^R66  million 
at  a  $10  per  hour  valuation  of  waiting  time.  See  Economics  of  Regulation  Domestic  Air 
Transport  (Brookings  Institution,  1974)  p.  172. 


81 

For  particular  city-pairs,  the  added  costs  are  more  striking.  Chicago  to  Los 
Angeles  is  an  example.  Pustay  calculated  that  if  waiting  time  were  valued  at 
$10.00  per  hour,  the  optimal  number  of  daily  flights  would  have  been  20  with 
a  73  percent  load  factor.  In  fact,  in  1969  there  were  30  flights  and  a  49  percent 
load  factor.  The  actual  fare  was  $106.  If  there  had  been  an  optimal  load  factor, 
the  cost  per  passenger  would  have  been  $50." 

Pustay's  results  have  several  limitations.  The  approach  may  over-value  wait- 
ing time.  It  is  a  market-by-market  analysis  and  some  excess  capacity  may  be 
justified  because  an  aircraft  serves  several  city-pairs.  The  calculations  are  for 
1969 ;  since  then  load  factors  have  improved  somewhat. 

Still,  the  magnitudes  of  Pustay's  results  are  so  large  that  they  clearly  support 
what  common  sense  suggests.  Flying  planes  half  empty  is  not  good  economics. 

2.  Regulation  ought  to  be  lessened  and  more  relianee  plaeed  on  competition. 
These  added  costs  are  likely  the  result  of  regulatory  policies.  Regulatory  com- 
missions have  been  loathe  to  see  price  competition  emerge.  At  the  same  time 
regulated  firms,  like  other  American  businesses,  have  been  eager  to  expand  their 
market  shares.  With  price  comi)etition  tabu,  the  competitive  rivalry  is  chan- 
nelled into  service  competition.  That  often  takes  the  form  of  adding  capacity 
to  provide  more  frequent  service  which  in  turn  raises  costs.  The  higher  costs 
as  they  spread  to  the  industry  generally  can  then  become  the  basis  for  a  request 
for  a  rate  increase. 

One  solution  is  regulation  of  capacity,  but  the  better  solution  may  be  in  the 
opposite  direction — to  allow  more  price  competition.  Consumers  should  have  the 
choice  between  service  and  price  that  unregulated  markets  generally  provide. 
And  there  seems  no  better  way  to  ensure  such  choice  than  through  allowing 
price  competition. 

3.  Congressional  hearing  on  the  Federal  regulatory  policies  are  very  much  needed. 
Congressional  hearings  are  a  highly  desirable  forum  in  which  to  raise  the 

critical  issues  of  regulatory  reform.  I  have  appeared  as  an  expert  witness  in 
regulatory  proceedings.  I  have  been  impressed  with  the  care  and  diligence  of 
regulatory  oflicials  as  well  as  their  concern  with  the  public  interest.  But  usually 
the  issues  are  narrowly  drawn  and  there  is  no  occasion  to  raise  broader  issues 
as,  for  example,  the  desirability  of  more  price  competition. 

Congress  now  has  a  full  agenda  of  pressing  problems.  One  should  not  urge 
adding  another  one  lightly.  But  regulation  seems  badly  askew ;  there  is  a  regu- 
latory crisis.  Inflation  and  rising  energy  prices  appear  to  have  made  existing 
regulatory  policies  even  more  expensive  to  the  public.  And  many  regulated  firms 
themselves  are  often  in  trouble,  from  Pan  Am  to  the  Penn  Central. 

I  would  add,  however,  Mr.  Chairman,  that  tlie  issue  of  regulatory  reform  is 
not  a  new  one.  President  Kennedy's  Transportation  Message  of  1962  was  a  force- 
ful plea  for  deregulation.  The  Kennedy  message  called  for  "greater  reliance  on 
the  forces  of  competition  and  less  reliance  on  the  restraints  of  regulation." ' 
The  legislation  that  accompanied  that  message  did  not  fare  well  in  Congress. 
And  yet  it  seems  to  me  that  President  Kennedy's  plea  for  deregulation  was  good 
economics  then ;  it  may  be  even  better  economics  today. 


°  Pustay,  op.  cit.  p.  123. 

■^  Quoted   in    Ann   F.    Priedlander.    The  Dilemma  of  Freight   Transportation,  Brookings 
Institution,   1970,  p.   vii. 


51-146   O  -  76  -  pt.  1 


82 

Prepared  Statement  of  Thomas  G.  Moore,  Senior  Fbxlow,  The  Hoover  Institu- 
tion ON  War,  Revolution,  and  Peace,   Stanford  University 

THE    REGULATORY    REFORM    OF    THE    CIVIL   AERONAUTICS    BOARD 

It  is  a  great  honor  and  privilege  to  be  here  today  to  give  my  views  on  this 
important  topic.  This  subcommittee  must  be  commended  for  leading  the  way  in 
exploring  a  vital  topic — regulatory  reform. 

As  you  know,  next  year  marks  the  200th  anniversary  for  the  founding  of  this 
great  Nation.  It  also  marks  the  200th  anniversary  of  the  publication  of  one  of 
the  world's  greatest  books,  The  Wealth  of  Nations.  I  would  like  to  take  the 
text  for  my  statement  today  from  Adam  Smith's  opus.  While  he  wrote  in  1776, 
it  is  still  true  today  that : 

No  regulation  of  commerce  can  increase  the  quaiftity  of  industry  in  any 
society  beyond  what  its  capital  can  maintain.  It  can  only  divert  a  part  of  it 
into  a  direction  into  which  it  might  not  otherwise  have  gone;  and  it  is  by 
no   means   certain   that   this  artificial   direction  is  likely   to   be  more  ad- 
vantageous to  the  society  than  that  into  which  it  would  have  gone  of  its 
own  accord. 
Adam  Smith  understated  the  case.  My  research  and  that  of  others  show  that 
regulation  produces  wastes,  higher  prices,  and  often  poorer  service.  My  work 
has  covered  ICC  regulation  of  surface  freight  transportation,  the  regulation  of 
trucking  in   Europe,   the   regulation  of  electric  utilities  by   state  commissions, 
occupational  licensing,  and  the  regulation  of  stock  market  margin  requirements. 
As  a  result  of  these  studies  and  the  studies  of  others  it  is  possible  to  draw 
some  conclusions  about  regulation  as  a  whole.  Regulation's  main  effect  is  to  in- 
crease the  cost  of  the  product  or  service  offered ;  normally  consumers  will  have 
to  pay  higher  prices  ;  even  the  regulated  gain  little. 

Transportation  regulation,  which  I  have  been  studying  in  recent  years,  is 
particularly  relevant  to  the  topic  of  these  hearings.  I  found  in  studying  the 
regulation  of  surface  freight  transportation  by  the  Interstate  Commerce  Com- 
mission that  it  had  increased  the  cost  to  our  country  of  moving  our  goods  between 
$3.8  and  $8.8  billion  in  1968.  The  cost  today  with  inflation  is  obviously 
much  higher.  This  cost  stems  from  ICC  efforts  to  insure  that  each  of  the  firms 
under  its  control  is  profitable.  In  order  to  insure  profitability  of  even  ineflacient 
firms,  the  ICC  restricts  competition  by  attempting  to  give  each  firm  a  limited 
market  that  few  if  any  other  firms  my  serve.  In  order  to  restrict  competition 
firms  are  often  granted  authority  to  carry  goods  from  one  part  of  the  country  to 
another  but  without  authority  to  carry  goods  on  the  back  haul.  Route  restrictions 
have  forced  trucking  firms  to  drive  hundreds  of  miles  out  of  their  way  or  not 
offer  a  through  service  between  points  they  are  authorized  to  serve. 

I  have  just  returned  from  studying  regulation  of  trucking  in  Europe.  West 
Germany  has  the  most  strict  regulation  in  Europe,  controlling  both  rates  and 
trucking  capacity.  Trucking  rates  in  West  Germany  in  1973  were  over  50  percent 
higher  than  in  Great  Britain  which  has  no  economic  regulation  whatsoever. 
But  interestingly  enough  profits  appear  to  be  as  high  or  higher  in  the  uncontrolled 
British  situation  than  in  West  Germany. 

Economic  theory  and  some  evidence  have  shown  that  regulation  of  utilities 
tends  to  inflate  costs.  Becau.se  regulators  permit  firms  to  earn  a  certain  rate  of 
profit  on  their  investment,  regulated  utilities  have  a  tendency  to  substitute  capi- 
tal, which  goes  into  their  rate  ba.se,  for  labor.  This  means  that  they  can  earn 
larger  profits  although  costs  of  production  as  well  as  utility  rates  will  be  higher. 
My  own  research  indicates  that  utility  rate  regulation  has  not  appreciably  re- 


83 

duced  rates  below  what  the  firms  would  charge  in  the  absence  of  such  regulation. 
Under  some  plausible  assumptions  rates  are  actually  higher  for  electric  utilities 
than  they  would  be  if  there  were  no  controls. 

The  problem  is  that  regulation  as  a  process  is  inherently  faulty.  No  rewriting 
of  the  regulatory  statutes  or  appointment  of  better  regulators  can  do  more  than 
make  some  minor  improvements  in  a  bad  situation.  There  are  a  number  of  reasons 
why  regulation  is  inherently  faulty,  some  of  which  I  will  touch  on,  others  will  be 
discussed  in  more  depth  by  my  colleague  this  morning,  Roger  Noll. 

I  would  like  to  emphasize  the  compulsion  of  each  regulator  to  protect  his  par- 
ticular industry.  In  some  cases  the  act  establishing  the  regulation  makes  specific 
the  need  to  promote  the  health  of  the  industry.  For  example  the  Civil  Aeronautics 
Act  specifies  in  Title  I  that : 

In  the  exercise  and  performance  of  its  powers  and  duties  under  this  Act, 
the  Board  shall  consider  the  following  *  *  *  as  being  in  the  public  inter- 
est *  *  *  (a)  The  encouragement  and  development  of  an  air-transportation 
system  *  *  *  (b)  The  regulation  of  air-transportation  in  such  manner  as 
to  *  *  *  foster  sound  economic  conditions  in,  such  transportation  *  *  *. 

Given  that  mandate  how  can  the  CAB  idly  stand  by  while  Pan  American  fails? 
It  can't.  In  1974  the  CAB  approved  four  rate  increases  for  international  opera- 
tions to  bail  out  Pan  Am  and  TWA. 

i^ailure  of  a  major  company  regulated  by  an  agency  is  considered  to  be  a 
failure  of  that  regulatory  agency.  But  under  a  few  market  system,  both  the 
carrot  and  the  stick  are  needed.  Failure  is  necessary  to  force  firms  to  meet  the 
needs  of  the  public.  Even  where  an  act  establi>hing  a  regulatory  commission 
does  not  specify  that  a  prosperous  industry  is  important,  regulators  will  believe 
that  unless  the  regulated  firms  earn  profits  they  will  be  unable  to  serve  their 
customers.  Thus  the  regulators  will  consider  it  their  duty  to  the  public  and  to 
consumers  to  make  the  industry  profitable  and  one  of  the  most  efficient  ways  to 
accomplish  that  is  to  reduce  competition. 

Your  committee  in  hearings  last  fall  investigated  a  clear  example  of  the  tend- 
ency of  regulation  to  restrict  competition.  As  your  excellent  staff  report  brought 
out,  the  CAB  was  attempting  to  set  minimum  charter  fares  to  I'educe  competi- 
tion. To  quote  from  your  report,  such  minimum  rates  were  sought  "in  order  to 
help  Pan  American  with  its  financial  problems." 

Prohibiting  regulators  from  restricting  competition  in  order  to  protect  com- 
petitors won't  work.  The  Congress  in  the  Transportation  Act  of  1958,  wrote  a 
clear  prohibition  on  protecting  one  mode  from  competition  of  another,  yet  the 
ICC  has  continued  to  do  just  that.  Protecting  competitors  and  reducing  competi- 
tion is  inherent  in  all  economic  regulation. 

In  inherently  competitive  industries  such  as  airlines  and  trucking  it  is  vir- 
tually impossible  for  the  regulators  to  eliminate  competition.  The  best  the  regu- 
lators can  do  is  to  eliminate  price  comi>etition  and  thus  to  hold  prices  up.  But 
this  simply  stimulates  firms  to  compete  in  non-price  areas.  A  few  years  ago  the 
international  airlines  engaged  in  a  sandwich  war  to  attract  passengers.  More 
recently  in  the  U.S.  we  have  witnessed  a  seating  war,  with  airlines  competing  to 
offer  the  most  comfortable  .seats  in  coach  class.  Last  fall  there  was  a  free  drink 
war.  Since  rates  are  identical  due  to  CAB  regulation,  airlines  compete  by  pur- 
chasing the  most  up-to-date  equipment  and  phasing  out  older  and  slower  equip- 
ment long  before  it  would  be  obsolete  under  a  more  rational  system.  No  scheme 
of  regulation  that  permits  management  to  manage  the  firms  can  eliminate  non- 
price  competition.  There  are  an  infinite  number  of  ways  firms  can  compete.  As  a 


84 

result  of  the  non-price  competition,  most  of  the  profits  originally  generated  by 
high  rates  are  dissipated. 

In  adtiition  to  the  inevitability  of  non-price  competition,  which  tends  to  erode 
the  profits  that  the  regulators  are  attempting  to  guarantee  he  industry,  the  firms 
compete  for  regulatory  favors.  If  a  route  to  Hawaii  or  Florida  is  profitable,  firms 
can  and  will  spend  millions  in  legal  fees  and  legal  maneuvers  attempting  to  win 
the  franchise  or  to  block  others  from  securing  the  franchise.  For  example,  sup- 
pose that  a  firm  is  earning  one  million  in  clear  profits  a  year  from  a  route.  It  is 
then  worth  spending  up  to  a  million  a  year  to  block  the  introduction  of  competi- 
tors. To  the  would-be  comi>etitor  it  may  be  worth  half  a  million  if  he  enters.  As 
a  result  the  potential  entrant  will  be  willing  to  spend  large  sums  to  secure  a 
license,  perhaps  as  much  as  two  and  a  half  million  dollars.  The  entire  profit  on 
such  a  route  can  be  dissipated  in  this  competition  for  licenses. 

In  many  ways  regulation  is  the  worst  of  all  worlds  for  everyone.  While  the 
regulators  try  to  guarantee  profits,  non-price  competition  and  legal  competition 
work  to  eliminate  the  profits.  Consumers  pay  high  prices  but  the  regulated  firms 
don't  reap  the  benefits.  Costs  are  inflated ;  profits  are  no  greater  than  they  would 
be  without  regulation  ;  and  prices  are  higher. 


Prepared  Statement  of  Roger  G.  Noll,  Professor  of  Economics,  California 
Institute  of  Technology 

the  causes  of  regulatory  failures 

During  the  past  15  years  an  impressive  literature  has  developed  in  economics, 
law  and  political  science  evaluating  the  performance  of  regulatory  agencies. 
To  an  extent  uncharacteristic  of  academic  research,  this  literature  is  remark- 
ably consistent  in  its  principal  finding.  Most  scholars  of  public  policies  toward 
business  have  come  to  believe  that  public  utility  regulation — the  control  of 
prices,  profits,  service  quality  and  the  entry  and  exit  of  firms  from  the  industry — 
is  an  exceptionally  costly,  ineffective  instrument  of  government  policy.  Numerous 
studies  published  in  the  last  few  years  have  identified  gross  inefficiencies  and 
inequities  in  the  key  sectors  subject  to  regulation — transportation,  communica- 
tions, energy — that  can  be  traced  to  seemingly  nonsensical  rules  and  policies  of 
regulatory  agencies. 

The  purpose  of  my  statement  is  not  to  discuss  in  detail  the  findings  of  these 
research  studies,  since  many  of  the  authors  of  such  studies  will  be  heard  at 
these  hearings.  Instead,  this  statement  deals  with  the  causes  of  regulatory  fail- 
ures, with  the  purpose  being  to  contribute  to  the  dialog  about  the  possible  mecha- 
nisms for  reforming  or  replacing  regulatory  institutions. 

In  establishing  institutions  to  control  the  market  activities  of  private  firms, 
government  is  faced  with  two  dilemmas.  These  dilemmas  are  probably  unresolv- 
able,  and  thereby  guarantee  that  the  agency  will  impose  serious  social  costs  if  it 
tries  to  do  the  job  for  which  it  was  created. 

The  first  dilemma  arises  from  the  incompatibility  of  structuring  a  decision 
process  that  is  "fair",  e.g.,  decisionmakers  are  accountable  for  their  actions, 
individuals  are  accorded  due  process,  etc.,  and  that  makes  decisions  with  dis- 
patch. It  is  inconceivable  that  the  kinds  of  power  to  redistribute  wealth  that 


85 

inheres  in  regulatory  institutions  would  be  delegated  to  any  bureaucracy  with- 
out subjecting  the  decisions  to  judicial  review  and  without  giving  affected  in- 
dividuals the  right  to  plead  their  cases  before  decisionmakers. 

To  safeguard  the  rights  of  individuals  against  capricious  and  arbitrary  de- 
cisions of  an  agency  requires  establishing  decisionmaking  procedures  that 
normally  cause  decisions  on  important  issues  to  be  protracted.  This  can  create 
serious  problems  in  three  types  of  circumstances :  when  rapid  inflation  pushes 
costs  up  and  firms  can  not  respond  to  cost  increases  by  raising  prices  until  a 
protracted  regulatory  review  has  been  completed,  when  a  technological  develop- 
ment that  would  lower  costs  and  improve  service  quality  can  not  be  fully  ex- 
ploited without  regulatory  review,  and  when  an  innovative  new  firm  seeks  to 
enter  a  regulated  market  but  must  first  win  the  approval  of  the  regulators. 
The  last  two  effects  significantly  reduce  the  incentive  to  the  firm  to  be  innovative, 
since  to  all  the  risk  and  costs  of  innovation  are  added  the  expense  in  time  and 
resources  of  a  regulatory  proceeding,  while  the  risk  of  a  more  innovative  com- 
petitor capturing  a  superior  market  position  is  reduced. 

The  second  major  dilemma  of  regulatory  institutions  reflects  the  trade-off  be- 
tween an  expensive  regulatory  process  and  a  process  that  is  insulated  from  the 
individuals  affected  by  its  outcomes.  In  part  because  the  preservation  of  account- 
ability and  due  process  through  judicial  review  makes  participation  in  the  regu- 
latory process  expensive,  and  in  part  because  the  vast  majority  of  persons  who 
are  affected  by  regulatory  decisions  are  not  eft'ectively  organized  to  represent 
themselves  in  regulatory  proceedings,  the  flow  of  information  and  proposed  rules 
to  the  agency  is  one-sided.  A  passive  agency  that  relies  upon  the  evidence  supplied 
by  participants  in  the  process  will  inevitably  make  decisions  based  upon  incom- 
plete as^sessments  of  the  issues  at  hand ;  an  agency  that  can  generate  its  own, 
independent  flow  of  information  on  every  important  case  will  be  much  more  ex- 
pensive to  operate.  In  fact,  none  of  the  federal  regulatory  authorities  engaged  in 
price  and  profit  regulation  devotes  anywhere  near  the  resources  to  generating 
information  for  use  in  regulatory  proceedings  that  is  committed  by  the  industries 
they  regulate. 

The  recent  debate  over  the  regulation  of  cable  television  is  an  illustrative  case 
in  point :  the  final  regulatory  rules  were  worked  out  by  a  coalition  of  broadcasters, 
cable  system  owners  and  program  producers.  While  each  of  these  groups  cast 
their  arguments  defending  their  own  positions  in  terms  of  the  beneficial  effects  a 
system  sati.«fying  them  would  have  on  society  at  large,  and  while  the  FCC  devoted 
some  staff  resources  to  investigating  the  stake  of  viewers  in  the  issue,  nevertheless 
the  final  comi)romise  was  hammered  out  exclusively  by  the  well-represented 
special  interests,  and  was  adopted  by  the  FCC  explicitly  because  none  of  the 
three  groups  would  appeal  the  compromise,  legally  or  politically. 

These  endemic  problems  of  regulation  do  not  necessarily  lead  to  the  conclusion 
that  under  no  conditions  should  industry  be  regulated.  All  that  they  imply  is  that 
certain  inevitable  costs  are  to  be  expected.  Generally,  these  costs  will  be  higher  if : 
1)  the  sophistication  required  to  determine  the  true  technical  and  economic  condi- 
tions of  the  industry  is  greater,  2)  the  greater  the  iX)rtion  of  the  effects  of  regula- 
tion that  is  diffused  over  a  large,  heterogeneous  group  that  is  unlikely  to  be  effec- 
tively organized,  and  3)  the  more  uncertain  and  rapidly  changing  the  economic 
environment  in  which  the  regulated  firms  operate,  such  as  is  the  case  during 
a  period  of  rapid  inflation  or  deepening  recession. 


The  cost  of  regulation  is  also  likely  to  be  greater  the  more  competitive  the  regu- 
lated industry.  This  is  because  entrenched  firms  are  to  some  extent  protected  from 
competition  by  the  slowness  and  costs  of  procedures  that  must  be  followed  by 
new  entrants  into  a  market.  In  addition,  the  regulatory  forum  allows  competitive 
firms  to  engage  in  a  far  greater  degree  of  collusive  behavior  than  would  be 
permitted  in  a  normal  competitive  circumstance.  And  by  exercising  some  control 
over  the  information  flowing  to  the  agencies,  while  constituting  the  primary 
threat  of  appeal  to  the  agency's  decision,  the  industry  can  push  the  agency  to  make 
policies  and  adopt  rules  that  enforce  cartel-like  behavior  upon  the  firms  in  the 
industry.  These  type  of  actions — the  mutual  service  reduction  agreements  among 
the  airlines  that  were  promoted  by  the  CAB  are  good  examples — would  surely  be 
antitrust  violations  in  the  absence  of  the  protective  umbrella  of  the  regulatory 
statutes. 

The  principal  conclusion  of  the  preceding  remarks  is  rather  straightforward : 
one  should  keep  in  mind  the  costs  of  regulation  when  deciding  whether  to  regulate 
any  particular  industry,  and  whether  to  continue  to  regulate  an  industry  that  was 
subjected  to  regulation  when  circumstances  were  far  different  from  the  present. 
For  example,  if  an  industry  becomes  increasingly  able  to  support  a  competitive 
market  structure  as  time  progresses,  the  expected  costs  of  regulation  will  increase 
while  the  expected  benefits  of  regulation  will  decline. 

Presumably  the  argument  for  regulation  of  most  industries  is  more  complex 
than  simply  the  avoidance  of  monopolistic  practices.  In  the  case  of  domestic  air- 
lines, regulation  has  a  certain  promotional  feature,  owing  to  the  affects  at- 
tributed to  an  extensive  air  route  structure  on  economic  development,  the  dis- 
tribution of  economic  activity,  and  national  defense.  "Without  debating  the  merits 
of  these  contentions — which  are,  of  course,  eminently  debatable — the  issue  re- 
mains which  policy  instrument  can  most  effectively  generate  the  desired  route 
structure.  The  diflBculty  with  the  regulatory  approach  is  that  this  explicit  pro- 
motional aim  gives  the  regulatory  authority  an  even  greater  industry-orientation 
than  the  institutional  dilemmas  would  normally  produce.  On  the  industry's  part, 
promotional,  cost-plus  regulatory  policies  generate  overly  optimistic  investment 
plans  since  the  incentive  for  investment  is  heightened  by  the  belief  by  firms  that 
regulators  will  act  to  ameliorate  at  least  some  of  the  financial  losses  that  will 
be  suffered  if  an  investment  plan  proves  too  optimistic.  On  the  agency's  part,  fi- 
nancial failure  of  a  regulated  firm  is  at  best  an  embarrassment  and  at  worst  a 
serious  problem :  the  failure  may  be  attributed  to  the  decisions  of  the  agency, 
and.  in  any  event,  will,  at  least  temporarily,  cause  the  pattern  of  service  to  fall 
short  of  the  promotional  objective  that  led  the  agency  to  acquiesce  to  overinvest- 
ment in  the  first  place.  The  result  is  a  continuing  spiral  of  overly  optimistic 
expansions — too  many  new  planes  flown  too  frequently  over  too  many  routes — 
followed  by  policies  propounded  by  regulators  to  bail  out  their  charges. 

Deregulating  a  competitive  industry  will  undoubtedly  have  some  significant  ad- 
justment effects.  Prices  and  profits  will  probably  fall,  dramatically  so  in  the  short 
run,  some  routes  will  be  abandoned  or  be  subjected  to  sharp  service  curtailments, 
and  some  firms  may  face  bankruptcy  and  reorganization.  But  in  the  long  run, 
more  and  better  service  and  normal  profits  can  be  expected  and  at  reduced  prices, 
as  firms  learn  to  operate  more  efficiently  and  as  the  price  system  is  used  as  a 
signaling  device  for  tailoring  service  to  user  tastes. 

If  the  resulting  route  structure  is  judged  to  be  somehow  unsatisfactory  by  the 
political  process,  competitive  bidding  for  contracts  to  serve  unprofitable  routes 


87 

or  to  fly  unprofitably  large  and  fast  aircraft  into  some  cities  will  prove  a  far 
more  efficient  mechanism  for  promoting  the  industry  than  regulation.  The  key 
to  the  contract  alternative  is  its  reliance  on  the  natural  forces  of  competition  in 
all  markets,  including  the  subsidized  ones.  Even  if  Congress  desires  to  promote  a 
more  developed  route  structure  than  the  competitive  market  would  yield  but 
without  paying  subsidies  from  general  revenues — a  circumstance  which  plausibly 
suggests  that  a  subsidy  should  not  be  paid  in  any  event — an  explicit  intraindustry 
transfer,  retaining  the  competitive  market  structure,  is  still  feasible  and  subsi- 
dized routes  could  be  financed  by  a  tax  on  airline  tickets,  for  example. 

Economists  (myself  included)  blanch  at  most  any  proposal  to  engage  in  gov- 
ernment promotion  of  an  industry,  especially  when  financed  by  the  profitable 
activities  of  the  industry.  Such  "cross-subsidization"  extracts  its  own  costs  in 
terms  of  efl!iciency  of  the  economic  system,  and  these  are  not  trivial.  But  the 
point  remains  that  the  economists'  arguments  for  unregulated  competition  are  not 
dependent  upon  their  position  on  cross-subsidization,  and  the  two  issues  should 
not  be  confused.  Regulating  a  competitive  industry  inevitably  generates  costs  but 
provides  no  benefits,  except  that  in  the  short  run  existing  firms  in  the  industry 
that  have  overinvested  in  response  to  perverse  regulatory  incentives  experience 
losses  when  the  protective  shield  of  regulation  is  removed.  The  efl^cient  way  to 
promote  an  industry,  or  to  force  it  to  respond  to  considerations  not  normally  re- 
flected in  the  marketplace,  is  to  do  so  directly  through  taxes,  subsidies  and  per- 
formance standards  tied  specifically  to  the  policy  concern  of  the  government. 


Mr.  Breyer.  I  think  it  will  be  2:30  when  we  reconvene  this 
afternoon. 

[Whereupon  the  subcommittee  adjourned  at  1 :25  p.m.,  to  recon- 
vene at  2:30  p.m.  that  same  day.] 

AFTERNOON    SESSION 

Senator  Kennedy.  The  subcommittee  will  come  to  order. 

Our  next  witness  is  Mr.  Alfred  Kahn,  chairman  of  the  Public 
Service  Commission,  State  of  New  York,  who  taught  economics  at 
Yale  University  and  served  as  a  senior  staff  member  of  the  economic 
advisers,  and  is  presently  on  leave  from  Cornell  University.  He  has 
written  extensively  in  the  area  of  economic  regulation. 

Mr.  Kahn. 

STATEMENT  OF  ALFRED  E.  KAHN,  CHAIRMAN,  NEW  YORK  STATE 
PUBLIC   SERVICE   COMMISSION 

Mr.  Kahn.  I  am  very  honored  by  your  invitation  to  testify  here. 

I  have  been  asked  to  hold  my  testimony  to  10  minutes,  which  means 
I  will  have  to  talk  terribly  fast.  I  will  make  no  effort  to  read  my 
statement. 


88 

I  hope  I  am  not  here  under  false  pretenses.  I  have  been  a  student  of 
economic  reguLition  for  some  time  and  now  a  practitioner,  but  I  am 
not  an  expert  on  the  airline  industry  and  do  not  presume  to  come  to 
you  with  explicit  reconunendations. 

There  are  certain  common  tendencies  and  patterns  in  regulation, 
however,  which  I  would  like  to  bring  to  your  attention.  In  fact.  I  will 
make  four  points  which  may  be  illuminating  to  you.  at  least  10  minutes 
worth.  If  you  try  to  follow  my  statement  you  would  not  succeed. 

KEGULATIOX    IS  AX  IMPERFECT    IXSTITUTIOX 

First,  it  is  a  commonplace  observation  that  regulation  is  a  very  im- 
perfect institution.  I  think  it  is  essential  where  competition  is  not  feasi- 
ble, and  of  course  that  is  where  I  happen  to  operate,  in  Xew  York  State, 
that  is  to  say  where  competition  is  inconsistent  with  economies  of  scale. 
But  it  cannot  do  what  competition  does.  It  cannot  innovate.  It  cannot 
force  companies  to  be  efficient.  It  cannot  force  management  to  be  enter- 
prising. It  cannot  make  companies  risk  their  own  capital.  So  regulation 
has  an  inevitable  large  element  of  cost-plus  in  it  with  all  the  familiar 
deficiencies  of  such  arrangements. 

REGrLATIOX   IS   AXTITHETICAL   TO    COMPETITIOX 

Point  Xo.  "2 :  Although  there  are  many  ways  in  which  it  makes  sense 
to  try  to  introduce  competition  into  a  regulated  system,  still  funda- 
mental competition  and  regulation  are  antithetical. 

I  think,  possibly  the  airline  industry  performs  better  than  it  would 
by  virtue  of  the  presence  of  some  competition  in  it.  But  fundamentally, 
there  is  something  inherent  in  regulation  that  makes  it  hostile  to 
competition. 

By  the  way.  this  has  nothing  to  do  with  honesty  or  corruption  or 
irresponsibility  of  regulatoi-s.  It  has  to  do  with  the  fact  that  under 
competition  nobody  is  responsible  for  supply,  no  single  firm  has  an 
obligation  to  serve.  The  protection  of  consumers,  the  assurance  of  sup- 
ply comes  from  the  impersonal  functioning  of  the  competitive  market. 

In  a  regulatory  situation,  in  contrast,  we  rely  on  chosen  instruments, 
identifiable  firms  and  the  i-egulator  himself. 

As  a  result,  I.  as  chairman  of  the  Public  Service  Commission  of 
New  York,  feel  a  kind  of  direct  pei-sonal  responsibility  for  seeing 
to  it  that  lights  will  go  on  in  19S5  when  people  flick  on  the  switches. 
That  means"  that  I  have  to  be  very  solicitious  of  the  financial  health 
of  those  chosen  instrument  companies.  Similarly,  every  i-esponsible 
airline  regulator  will  undoubtedly  tell  you  that  he  has  an  enonnous 
responsibility  for  the  continuation  of  ample,  safe,  and  economical  air 


89 

service.  That  inevitably  produces  a  distrust  of  price  competition.  It 
is  a  nuisance,  a  threat  to  the  financial  health  of  the  chosen  instruments. 
Competitive  innovations  may  suddenly  render  obsolete  a  whole  bunch 
of  equipment.  Competitors  have  an  inherent  tendency,  in  the  words  of 
regulators  and  regulatees,  to  skim  the  cream  off  the  market,  which  is 
only  to  say  they  tend  to  go  in  naturally  where  prices  are  high,  and 
they  stay  out  where  costs  are  high  relative  to  price.  So  the  regulator 
will  ask  you  how  they  are  supposed  to  supply  continued  service  in 
bad  weather  as  well  as  good,  in  the  winter  as  well  as  the  sununer,  over 
lightly-traveled  as  well  as  heavily-traveled  routes,  if  competitors  are 
allowed  to  come  in  and  skim  off  the  cream  off  the  profitable  operations 
that  support  the  unprofitable.  So,  to  a  regulator,  competition  is  a 
nuisance. 

This  means  that  where  you  are  dealing  with  an  industry  that  is 
structurally  competitive — the  brokerage  business  on  security  ex- 
changes, trucking — regulation  typically  involves  cartelization.  It 
means  holding  prices  up,  not  down,  it  means  preserving  market  shares 
of  existing  firms.  Now,  that  is  a  distinction  not  often  made.  Ask  your- 
self when  you  look  at  a  particular  instance  of  regulation :  Is  it  f imc- 
tioning  to  keep  price  down,  which  I  think  is  my  job  in  Xew  York 
State,  or  to  keep  prices  from  falling,  which  often  happens  in  trans- 
portation ?  Or  again,  is  it  trying  to  hold  the  quality  of  service  up,  or 
is  it  trying  to  hold  service  competition  down,  as  I  think  you  will  find 
in  the  airline  industry.  That  is  my  second  point.  There  is  a  basic 
antithesis  here.  You  have  to  choose. 

REGULATION   PRODUCES   CARTELIZATION   AND   INEFFICIENCY 

No.  3,  in  these  structurally  competitive  situations,  regulation  and  the 
cartelization  that  goes  with  it,  it  is  terribly  inefficient  in  terms  of 
producing  at  the  lowest  possible  cost.  In  some  ways,  it  is  the  worst  of 
all  possible  worlds.  It  is  worse  than  single-firm  monopoly ;  it  is  worse 
than  competition,  no  matter  how  imperfect  competition  is. 

It  is  hostile  to  letting  business  go  into  the  most  efficient  firms. 
Instead,  it  tries  to  preserve  the  market  shares  of  all  firms,  high-cost 
and  low-cost.  Think  of  the  ICC  and  its  limitations  on  competition  by 
the  railroads,  often  when  they  can  reach  out  and  take  business  at  a 
lower  incremental  cost,  not  letting  them  do  so.  Think  of  the  proration- 
ing  of  crude  oil.  To  the  extent  they  cut  back  output,  they  did  not  cut 
back  equally,  but  instead  they  imposed  stringent  controls  on  the  low- 
cost  wells,  at  the  extreme  of  holding  them  down  to  8  days  of  produc- 
tion a  month,  and  exempted  the  high-cost  marginal  producers.  They 
had  higher  quotas  for  deep  wells,  because  they  were  more  costly. 


90 

Cartels  encourage  inefficiency  in  another  way.  If  you  hold  price  up, 
it  induces  people  to  try  to  expand  capacity.  Inside  tne  cartel,  by  drill- 
ing additional  oil  weils  or  scheduling  more  flights,  or  outside  the 
cartel,  look  what  is  happening  in  the  oil  industry  today.  The  result 
is,  if  the  cartel  is  going  to  lunction,  it  has  to  cut  back  output  more  and 
more,  so  that  everybody  operates  at  an  inefficient  level  of  capacity. 

That  is  my  third  point :  Cartelization  tends  to  be  terribly  inefficient. 

Before  getting  to  my  fourth  point,  I  would  like  to  explain  the 
simple  economics  of  why  cartels  produce  inefficiency.  I  will  do  so 
in  the  form  of  a  series  of  propositions,  but  with  enough  illustra- 
tions to  demonstrate  that  I  am  talking  about  the  real  world.  If  regula- 
tion limits  competition,  it  must  be  because  some  competition  would 
otherwise  be  feasible:  Ability  and  will  to  compete  are  therefore 
present.  And  if  the  regulation  is  effective,  it  will  hold  price  above 
the  costs  of  at  least  some  producers  or  potential  producers.  I  have 
already  described  how  this  sets  up  persistent  temptations  for  firms 
already  inside  the  cartel  to  expand  their  capacity  and  output,  and 
for  firms  outside  the  market,  and  possibly  outside  the  boundaries  of 
the  cartel,  to  enter,  increasing  the  aggregate  capacity  hanging  over 
the  market  and  creating  the  necessity  for  progressive  cutbacks  of  out- 
put quotas,  if  the  price  is  to  be  sustained.  These  temptations  cease 
only  when  output  is  so  curtailed,  and  unit  costs  of  production  so 
increased,  by  the  production  cutbacks  that  entry  and  investment  in 
new  capacity  are  no  longer  attractive. 

REGULATION  INDUCES  EXCESS  PRICE  AND  SERVICE  TO  THE  EXTENT  THAT  THE 
INDUSTRY   IS    NATURALLY    COMPETITIVE 

For  exactly  the  same  reasons,  and  this  is  my  fourth  point :  Controls 
over  price  competition  are  subject  to  evasion  because  of  the  incentive 
they  provide  for  accentuated  quality  and  service  rivalry,  limited  only 
by  the  ingenuity  of  businessmen  in  seeking  new  methods  of  enticing 
customers  to  them.  I  do  not  have  to  cite  you  the  airline  examples  of 
that,  the  strenuous  competition,  instead  of  via  price,  in  adopting  the 
most  modern  equipment,  in  the  frequency  in  which  they  schedule 
their  flights,  in  attractive  hostesses,  in-flight  entertainment,  food  and 
drink. 

Let  me  state  the  general  underlying  principle:  If  regulation  or 
cartelization  prevent  price  from  falling  to  costs,  then,  to  the  extent 
that  competition  continues  to  prevail,  it  will  tend  to  raise  cost  to  the 
level  of  price. 


91 

One  of  the  most  flagrant  examples  of  this — and  it  is  a  liistorical 
one — I  do  not  know  wlietlier  it  represents  CAB  policy  today — was 
the  refusal  of  the  CAB  to  let  carriers  with  older  piston  equipment 
reduce  their  rates  sufficiently  below  the  level  for  jet  fares  to  keep  that 
piston  equipment  in  service  as  long  as  economically  justified.  Carriers 
asked  the  CAB  to  let  them  reduce  those  rates,  the  CAB  said  no  it 
would  not  permit  them.  Now,  if  the  prices  are  kept  equal,  then  of 
course  nobody  is  going  to  go  on  a  piston  craft. 

What  is  wrong  with  service  competition  of  this  sort?  Surely  in 
some  degree  it  is  obviously  desirable.  The  more  flights  you  have  sched- 
uled the  more  convenient  it  is.  What  is  wrong  with  it,  is  that  cus- 
tomers, if  you  do  not  have  price  competition,  are  not  given  a  choice, 
and  so  you  have  no  way  of  knowing  whether  your  quality  competition 
is  excessive.  The  only  way  of  testing  whether  the  increment  of  in- 
service  quality  involved,  for  example,  in  more  intensive  scheduling  is 
worth  the  higher  cost,  is  to  offer  shippers  or  travelers  the  choice  be- 
tween lower  rates  and  less  frequent  operations,  on  the  one  hand,  and 
higher  rates  to  cover  the  costs  of  more  frequent  scheduling,  on  the 
other.  The  same  flights  that  provide  no  food,  drink,  or  entertainment, 
on  the  one  hand,  and  sumptuous  flights,  on  the  other,  and  as  many 
other  combinations  as  feasible  in  between. 

In  my  paper  I  refer  to  the  same  tendency  in  the  security  brokerage 
business.  They  compete  in  salesmanship,  and  free  advice.  Wliat  about 
the  fellow  who  says  I  do  not  want  salesmanship,  I  just  want  to  con- 
summate a  transaction  ? 

That,  of  course,  is  what  competition  does,  it  off'ers  you  such  choices. 
Now,  in  these  circumstances,  it  is  understandable  that  regulators  have 
constantly  to  spread  the  net  of  their  regulation.  If  they  can  raise 
prices,  then  people  want  to  expand  output,  so  they  have  to  control  out- 
put. If  they  do  that,  they  find  it  attracts  new  firms  into  the  market,  and 
then  they  have  to  keep  firms  out  of  the  market.  If  they  do  that  and 
still  hold  the  price  up,  and  find  this  attracts  imports,  then  they  have 
to  put  quotas  on  inputs.  If  they  prevent  price  competition,  and  firms 
escape  it  by  engaging  in  destructive  quality  competition,  then  they 
find  themselves  forced  to  put  a  lid  on  quality  competition,  too. 

All  these  tendencies  of  regulation  in  a  structurally  competitive  in- 
dustry inescapably  raise  the  question  of  whether  it  would  not  be  pref- 
erable simply  to  abandon  economic  regulation,  and  open  the  field  to 
competition. 

Did  I  make  it  in  10  minutes  ? 


92 

THE  GENERAL  CONDITIONS  OF  DESTRrCTI^^R   COMPETITION 

Senator  Kennedy.  What  about  the  other  side  of  the  coin,  though, 
what  about  the  destructive  competition?  Don't  we  have  the  most  elab- 
orate service  of  air  transportation  in  the  world,  and  probably  the 
safest?  That  is  certainly  woiih  something  to  the  traveling  consumer. 
How  can  we  be  so  sure  that  if  you  allow  competition  you  will  not  get 
destructive  competition  and  uncertainty  and  unrealiability  ? 

Mr.  Kahn.  Those  are  real  questions  which  explain  my  qualification 
at  the  beginning,  I  am  not  going  to  be  able  to  give  you  decisive 
answers.  But  I  do  have  a  few  suggestions  of  places  to  look. 

First,  no  businessman  protected  from  competition  ever  believes  com- 
petition is  anything  but  destructive.  In  the  same  way,  he  does  not 
use  the  word  "competitor"  he  uses  "chiseler." 

Second,  there  are  conditions  which  are  conducive  to  destructive  com- 
petition, and  you  have  to  see  if  they  apply  in  this  case.  Where  you 
have  very  heavy  capital  costs,  or  enormous  economies  of  scale  such 
that  marginal  costs  are  typically  Avay  below  average  costs  you  will 
have  a  tendency  for  competition  to  drive  rates  down  to  that  level. 
You  will  want  to  look  and  see  whether  that  is  really  true  in  this  in- 
dustry. Third,  is  capital  immobile?  Once  it  is  there,  does  it  tend  to 
get  stuck  and  not  be  able  to  get  out  ? 

Well,  in  trucking,  of  which  I  have  a  greater  knowledge,  I  emphasize 
that  trucks  are  very  mobile,  they  can  move  from  one  market  to  the 
next.  Moreover,  a  large  part  of  your  costs  are  variable;  so  prices  can- 
not go  down  very  far.  If  you  can  move,  especially  with  transporta- 
tion equipment,  you  can  move  to  another  market,  competition  in  any 
market  cannot  be  destructive. 

Fourth,  is  entry  likely  to  be  excessive?  Well,  I  am  very  skeptical 
that  you  will  have  rapid  entry  into  airline  mai'kets.  It  is  not  an  easy 
thing,  where  you  have  product  ditferentiation  in  these  markets  and 
the  attractiveness  of  known  brands,  I  am  skeptical  of  that. 

Look  at  some  areas  where  you  have  unregulated  com])etition.  You 
have  probably  heard  the  story  of  California  and  Texas.  I  would  look 
very  carefully  at  those  instances.  It  appears  they  have  effective  com- 
petition, and  it  is  not  destructive. 

Senator  Kennedy.  Do  you  think  it  would  be  useful  to  have  some- 
body on  the  regulatory  commission  who  is  an  economist? 

Mr.  Kahn.  Why  I  think  it  would  be  marvelous.  No,  I  really  be- 
lieve that.  Senator  Kennedy.  It  is  amazing  to  me  how  few  econo- 
mists there  are.  I  think  it  mijrht  be  fatal  if  thev  are  all  economists. 


There  is  a  perspective  that  an  economist  brings  that  is  very  important. 
An  economist  tends  to  think  in  terms  of  benefits  versus  costs,  and  every 
decision  we  make  in  our  society  today  is  a  benefit-cost  measurement, 
whether  we  like  it  or  not. 

Senator  Kennedy.  Thanks  very  much.  I  hope  you  make  your  plane. 

It  was  very  interesting  and  very  helpful. 

[The  prepared  statement  of  Mr.  Kahn  follows :] 

Prepared  Statement  of  Alfred  C.  Kahn,  Chairman,  New  York  State  Public 
Service  Commission 

I  am  honored  by  your  invitation  to  testify  before  your  subcommittee  on  the 
reguhition  of  tlie  airline  industry.  I  trust  I  do  not  appear  here  under  false  pre- 
tenses. I  have  for  many  years  been  a  student  of  the  economics  of  regulation,  and 
now  find  myself  a  practitioner,  but  I  do  not  consider  myself  sufficiently  expert 
on  the  airline  industry  to  presume  to  give  you  specific  recommendations  about 
how  it  should  be  regulated,  or  whether  it  should  be  regulated  at  all. 

And  yet,  whi.e  it  is  true  that  each  regulated  industry  is  in  some  degree  unique 
and  the  policy  with  respect  to  it  must  be  designed  in  the  light  of  its  own  peculiar 
characteristics,  it  is  also  true  that  regulation  manifests  certain  tendencies  and 
raises  certain  problems  common  to  all  industries.  I  hope  therefore  that,  by  de- 
scribing to  you  those  general  tendencies  and  problems  that  seem  to  me  particularly 
pertinent  to  airlines,  I  may  be  of  help  to  you  in  your  effort  to  assess  the  system 
of  regulation  that  we  apply  to  that  industry  today  in  the  United  States. 

The  first  observation  I  would  like  to  make  is  that  competition  and  the  kind  of 
regulation  we  practice  in  the  public  utility  industries — and  that  is  the  only  kind 
of  regulation  I  am  concerned  with  in  this  testimony  ^ — are  inherently  antithetical. 
While  the  choice  between  these  two  control  mechanisms  is  rarely  absolute,  as  I 
will  point  out  presently,  society  typically  must  in  each  individual  instance  choose 
whether  to  rely  on  regulation  or  on  competition  to  protect  the  public  interest ;  it 
cannot  typically  have  both.  It  is  commonplace  that  direct  regulation  becomes 
necessary  where  competition  is  not  feasible;  regulation  is  imposed  because 
competition  is  throuiiht  to  be  ineffective.  And  it  is  now  also  commonplace  that 
regulation  has  a  strong  inherent  tendency,  in  turn,  to  control  and  eliminate  com- 
petition that  would  otlierwise  prevail. 

This  is  so  not  only  for  the  superficial  reason  that  regulation,  by  definition, 
typically  involves  the  imposition  of  limitations  on  competitive  entry  and  inde- 
pendent competitive  action  in  the  determination  of  price.  It  is  also  because  regu- 


1  Government  influences  the  functioning  of  the  economy  generally  in  a  wide  variety  of 
ways,  for  example,  by  repulating  the  supply  and  availability  of  money,  enforcinp:  contracts, 
providing  subsidies  or  tariff  jirotection,  prohibiting  unfair  competition,  imposing  standards 
for  packaging  and  product  contents,  licensing  entrants  into  various  trades  and  professions 
on  the  basis  of  qualifications,  .-ind  in  the  case  of  airlines,  licensing  pilots  and  imposing 
various  other  rules  in  the  interest  of  safety.  But  all  of  these  instances  of  regulation,  at 
least  in  principle,  are  intended  not  to  supplant  the  competitive  market  as  the  principal 
instrument  of  social  control,  but  to  supplement  it  to  remove  its  imperfections,  in  theory 
to  make  it  work  better.  The  regulation  thnt  I  am  concerned  with  in  this  testimony  is  the 
kind  that  is  practiced  in  the  public  utility  sectors  of  the  economy,  and  in  considerable 
measure  in  civil  aviation,  and  lias  as  its  central  purpose  the  direct  prescription  of  ind'istrial 
structure  and  performance,  by  such  devices  as  restricting  entry  into  the  market  to  the 
number  that  some  government  commission  determines  is  desirable  and  imposing  on  the 
certificated  firms  an  obligation  to  serve  all  customers  under  reasonable  conditions,  directly 
fi.xing  price,  and  prescribing  the  quality  and  conditions  of  service. 


94 

lation  tends  iuherently  to  place  a  heavy  emphasis  on  protecting  the  companies  it 
is  also  supposed  to  be  controlling.  I  do  not  mean  here  to  repeat  the  vulgar  popular 
notion  that  regulators  are  typically  "in  the  pockets  of  the  utility  companies,"  and 
somehow  untrue  to  the  public  interest  that  has  been  entrusted  to  them,  though 
there  are  undoubtedly  many  examples  of  this.  The  tendency  is  one  that  will 
inevitably  affect  also  honorable  and  dedicated  public  servants. 

The  reason  is  this :  Under  competition,  in  principle,  no  government  oflScial  and 
no  single  company  is  responsible  for  the  continuity  of  supply ;  no  company  has 
an  obligation  to  serve.  The  consumer's  protection  comes  from  the  impersonal 
functioning  of  the  competitive  market  itself,  from  the  rivalry  among  companies, 
from  the  fact  or  threat  of  competitive  entry.  Regulation,  instead,  relies  on  chosen 
instruments.  A  specific  company  is  given  a  franchise ;  and  that  company  and  the 
regulating  agency,  instead  of  the  market  itself,  bear  the  direct  responsibility  for 
serving  and  protecting  the  public.  That  responsibility  weighs  heavily  on  the  reg- 
ulator. I  feel  some  direct,  personal  responsibility  for  seeing  to  it  that  the  lights 
will  still  go  on  when  people  in  New  York  flick  their  switches  in  1985.  Since  it 
takes  six  to  twelve  years  to  install  new  base-load  generating  capacity.  I  have  to 
be  concerned  about  the  ability  of  the  franchised  electric  companies  in  my  State 
to  begin  taking  the  steps  today  that  will  assure  that  result  a  decade  from  now. 
And  that  means,  to  complete  the  explanation,  that  I  have  to  be  solicitous  of  the 
financial  health  of  those  chosen  instruments.  So  every  responsible  airline  regula- 
tor, similarly,  will  emphasize  his  heavy  responsibility  for  the  continued  provision 
of  ample,  safe,  and  economical  air  service  in  every  part  of  the  country. 

And  that  responsibility,  in  turn,  inevitably  breeds  a  distrust  of  competition. 
Price  competition,  particularly  in  times  of  excess  capacity,  is  a  threat  to  the 
financial  health  of  the  chosen  instrument  company.  Competitive  innovations,  intro- 
duced without  restraint,  may  suddenly  render  obsolete  the  utility  company's 
investment  in  as  yet  in  completely  depreciated  equipment,  leaving  the  residual 
of  depreciation  somehow  to  be  recovered  from  its  other  customers,  if  it  is  to  retain 
the  financial  health  and  ability  to  attract  the  capital  necessary  to  provide  con- 
tinued service.  Competitors  have  an  inherent  tendency,  in  the  words  of  regulators 
and  regulatees,  to  skim  the  cream  off  the  market — which  is  only  to  say,  very 
roughly,  to  compete  for  business  where  prices  are  far  above  costs,  and  to  leave  to 
the  chosen  instruments  the  markets  where  costs  are  far  above  price.  How,  the 
regulated  company  and  regulator  will  protest,  are  they  supposed  to  provide  con- 
tinued service  in  bad  weather  as  well  as  good,  in  the  winter  as  well  as  in  the 
summer,  over  lightly-traveled  as  well  as  heavily-traveled  routes,  if  competitors 
are  to  be  free  to  come  in  and  skim  off  the  profits  from  the  latter  that  have  been 
financing  service  on  the  former?  To  the  regulator,  then,  competition  is  disruptive 
and  threatening,  it  interferes  with  orderly  planning,  it  upsets  stable  markets ;  it 
is  something  to  be  restricted,  confined,  prohibited. 

You  will  not  need  my  help  in  seeing  manifestations  of  this  tendency  in  the  air- 
line industry. 

This  does  not  mean  that  competition  has  no  useful  role  to  play  in  regulated 
industries.  On  the  contrary.  Regulated  monopoly  is  a  very  imperfect  institution. 
The  authority  of  the  regulatory  commission  is  essentially  negative ;  at  best,  it 
serves  only  as  a  check  on  the  exercise  of  private  monopoly  power  ;  prevents  exces- 
sive profits  and  excessive  discrimination.  It  is  extremely  diflScult  for  it  to  take 
major  initiatives.  A  regulator  cannot  risk  his  own  capital,  and  the  14th  amend- 
ment puts  severe  limits  on  his  ability  to  force  the  companies  under  his  supervision 
to  risk  theirs.  He  cannot  force  a  company  to  be  progressive,  to  innovate,  indeed, 
even  to  be  efiicient.  He  cannot  do  what  a  good  management  can  do,  and  there 
is  very  little  he  can  do  about  what  poor  management  does.  In  short,  he  cannot 
supply  the  dynamic  stimulus  that  in  other  industries  is  supplied  by  competition. 


95 

There  is,  therefore,  a  very  respectable  body  of  opinion  that  regulation  really 
has  very  little  eftect.  This  view  merges  with  the  other,  which  I  have  already 
characterized,  that  regulators  tend,  almost  inevitably,  to  associate  their  concep- 
tion of  the  public  interest  with  that  of  the  companies  they  are  supposed  to  be 
regulating,  typically  protecting  them  against  competition  and  supplying  no  alter- 
native effective  stimulus.  Paradoxically,  according  to  this  view,  regulation  has  the 
greatest  eftect  in  areas,  like  transportation,  where  competition  could  otherwise 
prevail,  and  there,  because  of  its  tenuencies  to  protectionism  and  cartelization, 
it  tends  to  do  a  great  deal  of  harm ;  and  elsewhere,  in  the  presence  of  monopoly, 
its  effects  are  not  discernible. 

For  these  reasons,  where  it  can  be  permitted  without  intolerable  loss  of  efficiency 
competition  can  play  a  very  useful  supplementary  role  even  in  the  most  tightly 
regulated  industries.  In  my  judgment,  for  example,  while  the  basic  intercon- 
nected, national  communications  network  is  probably  something  like  a  natural 
monopoly,  competition  can  and  should  play  an  important  role  in  the  manufactur- 
ing industry  that  supplies  equipment  for  attachment  to  that  network  at  the  sub- 
scriber's end.  Similarly,  I  believe  that  such  competition  as  we  have  permitted 
in  the  passenger  airline  business  has,  on  balance,  improved  its  performance. 

Still,  to  return  to  my  first  major  point :  because  of  the  inherent  conflicts  and 
contradictions  between  competition  on  the  one  hand  and  regulation  on  the  other, 
and  because  of  the  inherent  tendencies  of  regulation  toward  conservatism,  pro- 
tectionism, and  cartelization.  society  must  periodically  reexamine  the  premises 
on  the  basis  of  which  it  decided  to  impose  on  the  public  utility  status  of  an 
industry,  and  consider  whether  a  return  to  essentially  unregulated  competition 
might  not  be  preferable,  as  this  Committee  is  doing  today.  This  is  especially 
important  in  those  industries,  like  transportation,  where  a  competitive  struc- 
ture may  well  be  feasible — that  is,  consistent  with  the  individual  suppliers 
achieving  most  or  all  of  the  available  economies  of  scale.  Transportation  is 
not  a  natural  monopoly.  It  is  precisely  in  such  situation  that  it  becomes  essen- 
tial for  us  periodically  to  ask  whether  regulations  may  not  be  doing  more  harm 
than  good.  In  my  own  judgment,  transportation  is  the  leading  example  of  an 
area  in  which  a  substantial  dose  of  dereguation,  and  perhaps  something  close 
to  complete  deregulation,  is  long  overdue. 

In  the  rest  of  these  comments,  I  will  suggest  to  you  why  I  think  this  kind  of 
reevaluation  is  particularly  necessary  in  an  industry  like  airline  transportation. 

Before  doing  so,  I  should  like  to  emphasize  that  competition  in  the  real  world 
is  also  a  very  imperfect  institution.  Consumers  are  rarely  adequately  informed 
about  the  choices  available  to  them,  and  as  a  result  the  competitive  advantage 
often  goes  to  the  more  effective  saleman,  or  the  less  scrupulous  advertiser,  rather 
than  the  most  efficient  producer  or  the  seller  who  gives  the  best  value  for  the 
dollar.  The  greater  the  number  of  independent  suppliers,  the  more  likely  mistakes 
are  to  be  made,  and  capital  committed  to  ventures  that  should  never  have  been 
undertaken.  Competition  is  often  wasteful,  and  produces  instability  and  uncer- 
tainty. But  most  of  us  regard  the  competitive  market  in  much  the  same  way  as 
we  regard  democracy — it  is  a  manifestly  inefficient  system  that  is  better  than  any 
available  alternative.  To  the  extent  competition  is  imperfect,  our  preferred  remedy 
is  to  try  to  diminish  its  imperfections,  rather  than  to  supplant  it  with  monopoly 
or  socialized  enterprise. 

But  public  utility-type  regulation  in  industries  that  are  potentially  and  struc- 
turally competitive  tends  to  produce  the  worst  economic  results  of  all — worse 
than  regulated,  franchised  single-form  monopoly,  on  the  one  hand,  and  worse 
than  unregulated  competition,  with  all  its  possible  wastes  and  imperfections,  on 
the  other.  There  are  so  far  two  major  reasons,  and  both  spring  from  the  fact  that 
in  industries  of  this  kind,  of  which  transportation  is  the  leading  example,  regu- 


96 

lation  specifically  involves  preventing,  controlling  and  limiting  competition — 
restricting  competitive  entry,  and  prohibiting  rivalry  in  price  and  service — in 
brief,  to  use  the  proper  term,  it  involves  cartelization. 

In  principle,  a  cartel  need  be  no  less  efficient  than  a  pure  monopoly.  Single- 
firm  monopoly  has  both  the  incentive  and  the  opportunity  to  produce  at  minimum 
cost,  to  take  fullest  possible  advantage  of  economies  of  scale,  to  adopt  the  most 
efficient  technology,  to  limit  capacity  to  the  amount  required  to  supply  the  market 
at  minimum  cost,  to  concentrate  production  in  the  lowest-cost  plants,  and  to 
operate  them  at  the  most  efficient  rates.  In  theory  a  cartel  could  do  all  these 
things,  too,  producing  the  cartel-determined  output  at  minimum  cost,  pooling, 
the  industry's  profits,  maximized  in  this  fashion,  and  distributing  them  according 
to  some  formula  among  the  cartel  partners. 

But  no  cartel  in  history,  regulated  or  unregulated,  has  to  my  knowledge  ever 
done  these  things.  The  typical  practice,  instead,  is  to  maintain  price  by  imposing 
output  quotas  on  the  several  members,  efficient  and  inefficient  alike.  Indeed, 
where  cartels  have  been  in  a  position  to  make  distim  tions,  they  have  regulated 
production  more  often  by  cutting  back  the  output  of  the  lowest-cost  producers 
than  the  other  way  around,  in  order  to  leave  room  in  the  market  for  the  higher- 
cost  firms,  whom  competition  would  otherwise  have  driven  out  of  business.  The 
result  has  been  gross  inefficiency  in  production.  We  have  had  the  abundant  ex- 
amples of  this  phenomenon  among  regulated  cartels.  Parity  price  supports  in 
agriculture  were  accompanied  by  the  imposition  of  acreage  limitations  across  the 
board.  In  petroleum  prorationing,  production  allowables  were  cut  back,  at  their 
lowest  point,  to  eight  days  a  month  for  the  typically  highest-volume  and  lowest- 
cost  wells,  while  exempted  from  all  such  restraints  were  the  highest-cost,  low- 
volume  marginal  or  stripper  wells,  and  deeper  wells  were  typically  granted  larger 
production  quotas  than  shallow  wells,  precisely  because  they  were  higher-cost ! 
And  in  transportation,  the  Interstate  Commerce  Commission  has  placed  limita- 
tions on  the  ability  of  railroads,  by  cutting  rates,  to  reach  out  for  traffic  that 
they  were  in  a  position  to  serve  at  lower  incremental  costs  than  competing 
trucks  or  barges. 

Moreover,  cartels  have  been  typically  incapable  of  imposing  full  controls  on 
investment  and  entry.  By  holding  prices  at  non-competitive  levels,  instead,  they 
have  tended  to  encourage  new  competitive  entry,  particularly,  in  areas  outside 
their  control ;  and  where  they  have  succeeded  in  restricting  entry,  they  have 
typically  been  incompletely  successful  in  restricting  the  making  of  additional  in- 
vestments by  firms  already  in  the  market — for  example,  the  drilling  of  grossly 
excessive  numbers  of  developmental  wells  in  the  oil  industry,  in  quest  of  addi- 
tional production  quotas.  Maintaining  prices  in  the  face  of  these  artifically 
stimulated  increases  in  production  capacity  has  in  turn  necessitated  further  cut- 
backs in  output  quotas,  foi'cing  producers  in  turn  to  operate  at  even  more  grossly 
suboptimal  levels,  with  correspondingly  higher  co.sts,  and  further  preventing  the 
distribution  of  the  business  to  the  lowest-co.st  suppliers.  In  these  important  ways, 
cartels  foster  inefficiencies  far  more  gross  than  either  single-firm  monopoly  or 
unregulated  competition. 

The  resulting  inefficiencies  are  in  no  sense  purely  theoretical.  The  wastes  in 
tran.sportation,  for  example,  have  been  estimated  as  running  to  billions  of  dollars 
annually  ;  and  the  wastes  of  excessive  developmental  oil  well  drilling  in  the 
late  1950's  and  early  1960's  in  this  country  were  estimated  by  knowledgeable 
industry  sources  as  running  on  the  order  of  $V2  billion  a  year. 

Second,  and  for  exactly  the  same  reason,  cartels  promote  waste  in  another 
way  that  is  particularly  pertinent  to  the  airline  industry,  by  encouraging  ex- 
cessive non-price  competition  or  service  rivalry. 

Perhaps  the  simplest  way  of  explaining  this  is  to  set  forth  the  economics  that 
underlie  both  of  these  two  tendencies  toward  inefficiency.  I  will  do  so  in  the  form 
of  a  series  of  propositions,  but  then  I  will  give  you  enough  illustrations  to  demon- 
strate that  I  am  talking  about  the  real  world.  If  regulation  limits  competition, 
it  must  be  because  some  competition  would  otherwise  be  feasible :  the  ability  and 
will  to  compete  are  therefore  present.  And  if  the  regulation  is  effective,  it  will 
hold  price  above  the  costs  of  at  least  some  producers  or  potential  producers.  I 
have  already  described  how  this  sets  up  persistent  temptations  for  firms  already 
inside  the  cartel  to  expand  their  capacity  and  output,  and  for  firms  outside  the 
market,  and  possibly  outside  tlie  boundaries  of  the  cartel,  to  enter,  increasing 
the  aggregate  capacity  hanging  over  the  market  and  creating  the  necessity  for 


97 

progressive  cutbacks  of  output  quotas  if  the  price  is  to  be  sustained.  These 
temptations  cease  only  when  output  is  so  curtailed,  and  unit  costs  of  production 
so  increased,  by  the  production  cutbacks  that  entry  and  investment  in  new 
capacity  are  no  longer  attractive. 

For  exactly  the  same  reasons,  controls  over  price  competition  are  subject  to 
evasion  because  of  the  incentive  they  provide  for  accentuated  quality  and  service 
rivalry,  limited  only  by  the  ingenuity  of  businessmen  in  seeking  new  methods  of 
enticing  customers  to  them  at  the  attractive,  cartel-sustained  price  levels.  Denied 
the  opportunity  to  compete  by  reducing  price,  they  are  induced  instead  to  compete 
for  business  in  other  ways  that  increase  costs. 

The  point  is  that  if  competition  is  sufficiently  strong  potentially  to  drive  price 
down  to  cost — and  that  is  the  reason  for  the  regulatory  restraints  being  imposed 
on  competition  in  tlie  first  place — it  will  also  ordinarily  be  sufficiently  strong  to 
induce  supplers,  confronting  a  price  above  costs,  to  seek  other,  non-price  methods 
of  producing  additional  sales. 

Please  observe  carefully  the  general  principle ;  it  is  an  important  one :  If  regu- 
lation or  cartelization  prevent  price  from  falling  to  costs,  then,  to  the  extent  that 
competition  continues  to  prevail,  it  will  tend  to  raise  cost  to  the  level  of  price. 

This  tendency  toward  accentuated  non-price  competition  is  of  course  not  con- 
fined to  the  regulated  or  cartelized  industries.  On  the  contrary,  and  for  similar 
reasons,  it  tends  to  take  place  also  in  non-regulated  industries  tliat  are  sufficiently 
concentrated  to  avoid  price  competition — witness,  for  example,  the  practice  of 
frequent  and  often  functionally  meaningless  but  nevertheless  cost-inflating  model 
changes  in  automobiles  and  appliances,  and  the  heavy  expenditures  on  adver- 
tising and  other  forms  of  product  differentiation  across  a  wide  spectrum  of 
oligopolistic  industries. 

But  there  are  striking  examples  in  the  regulated  sector.  The  Interstate  Com- 
merce Commission  is  not  permitted,  under  the  Motor  Carriers  Act,  to  place  limi- 
tations on  the  amount  of  equipment  and  facilities  or  the  schedules  put  into  effect 
by  certificated  tru.kers;  but  it  does  restrict  the  entry  of  common  carriers,  and 
it  does  control  prices.  The  consequence  is  a  tendency,  well-documented  in  the 
literature,  for  regulated  trucking  companies  to  compete  by  offering  greater 
frequency  of  service,  at  the  cost  of  lower  average  utilization  of  capacity. 

Similarly,  the  maintenance  of  non-competitive  brokerage  commission  rates  by 
the  New  York  Stock  Exchange  has  encouraged  brokers  to  engage  in  cost-inflating 
methods  of  service  competition — the  payment  of  large  commissions  to  salesmen, 
and  the  offering  of  costly  customer  services  in  the  form  of  free  advice  and  re- 
search, in  addition  to  the  basic  service,  which  is  the  consummation  of  trans- 
actions in  securities. 

In  the  airline  industry,  the  requisite  cartelization  is  achieved  by  the  CAB 
restrictions  on  competitive  entry,  the  resultant  fewness  of  competing  firms  along 
particular  routes,  and  the  rather  consistent  discouragement  of  competitive  rate 
reductions  and  special,  promotional  rates  by  the  Civil  Aeronautics  Board, 
domestically,  and  by  the  International  Air  Transport  Association.  As  a  result, 
as  anyone  can  observe,  the  airline  companies  compete  very  strenuously,  instead, 
in  adopting  the  most  modern  and  attractive  eq,uipment,  in  the  frequency  with 
which  they  schedule  fiights,  in  advertising,  and  in  providing  comfort,  attractive 
hostesses,  in-flight  entertainment,  food  and  drink. 

In  turn — reflecting  an  almost  inevitable  tendency  for  regulation  to  become 
ever  more  thorough  and  pervasive  in  structurally  competitive  situations,  because 
of  tlie  necessity  for  controlling  whatever  new  forms  of  rivalry  ingenious  com- 
petitors and  potentail  competitors  devise — the  CAB  and  the  lATA  have  been 
forced  to  try  to  control  this  service  rivalry  as  well.  Price  regulation  alone  is 
obviou.sly  meaningless,  if  quality  of  service  goes  unregulated.  In  the  more  mono- 
polistic, traditional  public  utility  industries,  where  regulation  has  had  the  prin- 
cipal purpose  of  holding  prices  and  profits  down,  commissions  have  found  it 
essential  to  regulate  quality  of  service  as  well  as  price :  the  consumer  can  be 
just  as  effectively  exploited  by  deteriorations  in  the  former  as  by  increases  in 
the  latter.  So,  in  these  more  structurally  comi^titive  markets,  where  regulation 
has  been  introduced  principally  to  prevent  competition  from  driving  price  down, 
commissions  have  had  to  recognize  that  the  service  competition  that  pushes 
costs  up  can  be  almost  as  "destructive"  as  unrestricted  price  rivalry — witness, 
for  example,  the  disastrous  impact  of  competitive  scheduling  of  flights  on  air- 
line load  factors,  costs  and  profits. 


51-146    O  -  76  -  pt. 


And  so  we  have  had  the  unedifying  experience  of  the  CAB  and  lATA  imjwsing 
restrictions  on  the  provision  of  free  drinks,  the  size  ana  sumptuousuess  of  meals, 
the  amount  of  space  between  seats,  authorizing  concerted  reductions  in  the 
scheduling  of  flights,  and  requiring  a  uniform  supplementary  charge  for  in-flight 
motion  pictures. 

One  particularly  troublesome  way  in  which  the  government-imi)osed  restric- 
tions on  price  competition  have  encouraged  cost-inflation  in  this  industry  has 
been  the  general  refusal  of  the  CAB  to  permit  carriers  with  older,  inferior 
equipment  to  set  substantially  lower  rates  in  order  to  preserve  their  market 
shares  in  the  face  of  the  introduction  of  newer  equipment.  Since,  when  the 
prices  are  equal,  the  customer  will  obviously  prefer  the  faster  and  more  com- 
modious jet  to  the  slower  piston  aircraft,  the  refusal  of  the  Board  to  permit  a 
substantially  lower  fare  for  the  latter  created  an  irresistible  temptation  on  the 
part  of  carriers  to  scrap  the  older  equipment  and  introduce  the  newer  as  rapidly 
as  possible,  as  Professor  Richard  Caves  has  pointed  out.  And  this  has  indeed 
been  a  conscious  policy  of  the  Board,  in  keeping  with  its  statutory  mandate  to 
promote  the  utilization  of  airline  transportation. 

This  last  example  clearly  invites  the  obvious  question :  what  is  wrong  with 
service  rivalry  of  this  kind?  Isn't  it  desirable  to  encourage  airlines  to  shift 
rapidly  to  newer,  faster  and  more  attractive  equipment?  Doesn't  more  frequent 
scheduling  mean  better  service,  because  it  means  a  traveler  has  a  correspondingly 
greater  certainty  of  being  able  to  get  a  flight  at  any  time  that  he  wants  it? 
What  is  wrong  with  having  a  financially  healthy  security  brokerage  business, 
enabled  by  the  restrictions  on  price  competition  to  provide  investors  with  the 
benefits  of  research  and  advice,  at  no  extra  charge,  and  providing  brokerage 
service  in  small  and  remote  localities  where  it  might  otherwise  be  unprofitable? 
Effective  competition  surely  does  require  constant  efforts  at  product  and  service 
quality  improvement. 

The  only  answer  an  economist  can  give  is  that  the  proper  balance  between 
service  and  price  rivalry  can  only  be  determined,  in  a  market  economy,  by  sub- 
jecting the  alternatives  to  a  market  test.  The  proper  prescription  is  to  give 
consumers  the  opportunity  to  choose  between  the  two  alternatives,  the  faster  jet 
aircraft  at  a  price  reflecting  the  higher  cost  of  its  introduction,  and  the  slower 
but  still  serviceable  piston  aircraft,  at  whatever  rates  down  to  operating  costs 
are  necessary  to  keep  them  utilized  as  well.  This  does  not  mean  that  old  equip- 
ment should  not  at  some  point  be  scrapped.  But  so  long  as  customers  will 
patronize  it  at  rates  that  exceed  the  variable  costs  of  operating  it,  it  continues 
to  have  economic  value  as  well  as  physical  serviceability ;  and  any  policy  that 
prevents  dropping  that  price  down  toward  variable  costs,  and  thereby  provides 
customers  no  incentive  to  keep  using  the  old,  promotes  premature  and  wasteful 
scrapping,  and  correspondingly  wastefuUy  rapid  introduction  of  the  new. 

The  only  way  of  testing  whether  the  increment  in  service  quality  consequent 
on  more  intensive  scheduling  is  worth  the  higher  cost  it  entails  is  to  offer  shippers 
or  travelers  the  choice  between  lower  rates  and  less  frequent  operations,  on  the 
one  hand,  and  the  high  rates  required  to  cover  the  costs  of  more  frequent  sched- 
uling, on  the  other.  The  same  is  true  of  flights  that  on  the  one  hand  provide 
minimum  leg  room,  and  no  food,  drink,  or  entertainment,  and  sumptuous  flights, 
on  the  other,  and  as  many  quality  combinations  as  feasible  between  these  two 
extremes,  all  at  prices  reflecting  the  respective  costs  of  providing  them. 

Similarly  for  the  security  brokers :  only  if  investors  are  offered  the  choice 
between  the  barebones  service  of  consummating  security  purchases  and  sales,  at 
a  price  corresponding  to  the  cost  of  doing  just  that,  on  the  one  hand,  and,  on  the 
other,  the  execution  of  orders  plus  salesmanship,  plus  advice,  plus  research  will  the 
market  provide  the  economically  optimum  quantity  of  both.  So  long  as  the 
customer  pays  the  same  price  for  both  of  these  packages,  there  will  be  an  in- 
herent tendency  to  wasteful  and  cost-inflating  service  rivalry.  And  that,  it  clearly 
appears,  is  what  has  happened  in  the  airline  industry. 

The  objection  is  not  necessarily  that  airlines  have  been  forced  by  their  com- 
petition fo  inrnr  creater  costs  for  denser  schedules,  more  advertising,  meals,  and 
in-flight  entertainment  than  they  would  if  they  were  able  to  get  together  and 
restrict  such  expenditures.  Tlie  ob.iection  i«,  rather,  that  these  cost-inflating 
service  improvements  have  not  been  subjected  to  the  test  of  having  to  compete 
with  lower-cost  lower-price  alternatives.  The  defect,  in  short,  has  not  been  the 
.service  competition,  as  such,  but  the  inadequate  play  of  price  competition  along 
with  it.  In  point  of  historical  fact,  the  airline  industr.v — as  well  as  trucking,  and 
the  security  brokerage  business — offers  numerous  evidences  that  price  competi- 


tion  will,  if  given  a  chance,  hold  service  inflation  in  check.  Witness  the  popular- 
ity of  the  more  Spartan  non-scheduled  passenger  service,  the  desertion  of  regular 
security  brokers  by  large  investors,  and  the  wholesale  desertion  by  shippers 
from  common  carrier  to  private  trucking  wherever  they  had  the  opportunity 
to  do  so. 

In  these  circumstances,  the  attempts  of  the  regulators  to  limit  service  rivalry 
are  entirely  logical.  But  that  still  has  the  effect  of  limiting  the  range  of  cus- 
tomer choices.  And  it  inescapably  rai.«es  the  question  of  whether  it  would  not  be 
preferable  simply  to  abandon  economic  regulation  plus  cartelization  in  favor  of 
the  freer  play  of  price  competition. 


Senator  Kexnkdy.  Our  final  witness  is  Dr.  George  James,  senior 
vice  president  of  economics  and  finance,  Air  Transport  Association. 
He  has  spent  much  time  analyzing  economic  trends  and  problems  of 
the  association,  problems  on  behavior  of  the  member  airlines,  and  di- 
recting the  operations  of  the  Economic  Finance  Council.  Dr.  James  is 
a  member  of  f  he  Conference  of  Business  and  American  Economic  Asso- 
ciation, university  guest  lecturer  and  currently  serves  on  the  Doctorial 
Dissertation  Association  of  American  University. 

We  are  glad  to  have  you. 

STATEMENT  OF  DR.  GEORGE  W.  JAMES,  SENIOR  VICE  PRESIDENT 
OF  ECONOMICS  AND  FINANCE,  AIR  TRANSPORT  ASSOCIATION  OF 
AMERICA,  ACCOMPANIED  BY  JAMES  LANDRY  AND  GABRIEL 
PHILLIPS 

Dr.  James.  Thank  you,  Mr.  Chairman. 

I  am  accompanied  by  Mr.  James  Landry  and  Mr.  Gabriel  Phillips. 

I  have  submitted  a  lengthy  statement  which  I  will  not  read,  but  I 
do  have  a  summary  which  I  will  read  but  I  request  the  more  lengthy 
testimony  be  included  in  the  record. 

Senator  Kennedy.  It  will  be  included  in  the  record. 

Dr.  James.  I  find  it  enlightening  to  hear  the  testimony  we  have  just 
heard  from  Professor  Kahn.  I  have  many  smart  friends  who  have 
been  educated  under  Professor  Kahn. 

I  must  say,  however,  that  after  listening  to  what  I  heard  this  morn- 
ing from  all  of  the  other  witnesses  that  I  have  never  been  exposed  to 
such  incorrect  economics  in  the  airline  industry  except  9  years  ago 
when  I  first  came  into  the  business  myself.  I  think  it  is  terribly  impor- 
tant to  have  the  exposure  to  the  industry  and  understanding  of  it 
before  you  can  really  understand  the  practical  implications  of  some  of 
the  proposals  that  have  been  made  and  to  have  a  more  full  understand- 
ing of  why  so  many  of  our  witnesses  are  stumbling  on  questions  that 
you  are  asking  on  what  the  effects  of  deregulation  would  be. 

Well,  as  you  stated  on  December  16,  Senator  Kennedy,  the  basic 
objective  of  airline  regulation  is  adequate  service  at  reasonable  prices. 
We  believe  airline  regulation  has  met  that  test.  Nevertheless,  we  be- 
lieve that  consideration  by  this  subcommittee  and  others  of  the  issue  of 
regulatory  reform  presents  opportunities  not  only  for  thorough  review 
of  the  existing  structure  and  procedures,  but  more  important,  for 
seekmg  improvements  in  regulation.  These  improvements  can  lead  to 
an  even  more  effective  and  responsive  public  air  transportation  system. 


100 

The  more  extensive  statement  we  have  submitted  to  this  subcom- 
mittee, under  separate  cover,  deals  with  the  concept  of  re^ilated  com- 
petition in  air  transportation,  with  the  objectives  we  understand  are 
sought  through  regulatory  reform  investigations,  with  the  achieve- 
ments of  regTilated  competition  in  the  air  transportation  industry  since 
1938,  and  with  the  likely  adverse  impacts  of  many  of  the  concepts  of 
regulatory  reform  that  are  being  proposed.  Our  statement  also  makes 
recommendations  for  some  improvements  in  present  air  transport 
regulation. 

I  would  noAv  like  to  summarize  the  principal  points  made  in  our 
statement. 

ADVANTAGES    OF    REGULATED    COMPETITION 

The  system  of  air  transportation,  since  its  inception  as  an  effective 
force  in  the  American  economy  in  1938,  has  been  founded  on  the  prin- 
ciple of  regulated  competition.  This  has  been  necessary  because  of  the 
special  position  of  public  transportation  in  the  economy.  In  the  spec- 
trum of  economic  activity,  from  a  natural  monopoly  to  perfect  compe- 
tition, transportation  falls  in  between. 

It  is  unlike  specific  public  utilities  in  which  embedded  costs  are  im- 
mense and  therefore  economies  of  scale  are  apparent.  But  because  of 
the  need  and  value  of  providing  a  public  service  to  a  vast  interlinking 
network  of  cities  and  communities,  air  transportation  cannot  be  placed 
in  the  so-called  perfect  or  workable  competitive  environment  either. 
Further,  it  has  characteristics  that  under  deregulation  would  quickly 
lead  to  a  high  degree  of  concentration.  These  characteristics  include 
the  complexity  of  aircraft  operations,  the  increasing  expense  of  indi- 
vidual aircraft,  the  need  for  extensive  maintenance  facilities,  and  the 
fact  that  an  inordinately  high  percentage  of  the  passenger  markets  are 
between  points  of  low  traffic  density. 

The  present  national  air  transportation  system  is  characterized  by 
stability,  speed,  reliability,  and  above  all  a  vast  network  of  the  inter- 
locking air  routes  involving  58,000  city-pairs.  Its  value  to  the  Nation 
and  to  the  public  is  derived  from  all  of  these  essential  features  which 
would  be  seriously  <!ompromised,  if  not  lost,  through  deregulation. 

We  believe  it  is  essential  that  in  the  deliberations  today,  and  in 
those  which  will  follow,  special  care  should  be  taken  to  ensure  that 
it  is  the  real  world  of  air  transportation  which  is  the  subject  of 
scrutiny.  Hypothetical  models  alone — based  as  they  are,  not  on  the 
actual  demonstrated  needs  of  the  traveling  and  shipping  public,  but 
rather  on  theories  applicable  only  in  an  insulated  theoretical  environ- 
ment— may  be  helpful  as  a  guide  to  thinking.  But  their  application 
beyond  the  classroom  or  the  textbook  must  be  carefully  considered  in 
the  light  of  existing,  real  circumstances. 

Senator  Kennedy.  How  do  you  say  that ;  what  is  the  basis  of  that 
statement  ? 

Dr.  James.  I  do  not  be-ieve  anybody  was  recognizing  that  we  have 
58,000  city-pairs,  a  stable  environment  in  which  that  system  is  now 
operating,  that  we  have  met  the  test  of  keeping  prices  down,  that  we 
have  a  system  built  in  through  the  Civil  Aeronautics  Board  now  in 
which  the  consumer  interests  are  being  represented  and  the  prices 
that  we  might  seek  are  being  penalized  by  the  fact  that  we  may  not 
be  meeting  certain  of  those  standards,  and  many  other  points  that  I 


101 

will  bring  out  in  my  testimony  in  answer  to  your  question  in  a 
moment. 

Senator  Kennedy.  Why  would  not  the  Department  of  Transporta- 
tion understand  that  ? 

POTENTIAL     ABANDONMENT    OF   SMALL     TOWN     SERVICE      (CROSS-SUBSIDY) 

Dr.  James,  The  Department  of  Transportation,  through  the  sub- 
missions they  made  and  the  Domestic  Passenger  Fare  Investigation, 
was  not  taking  as  what  I  would  consider  a  practical  position  regarding 
load  factors,  load  factor  standards,  and  the  realities  of  service  to  this 
58,000  network  that  we  now  serve.  The  implications  contained  in 
many  of  the  submissions  they  made  would  have  the  load  factors  and 
load  factor  standards  beginning  abnormally  high,  and  the  only  way 
to  accomplish  this  would  be  to  cut  out  service  to  many. of  the  com- 
munities now  serviced,  thousands  of  them,  as  a  matter  of  fact. 

Senator  Kennedy.  Can  you  submit  a  list  of  which  ones  that  would 
be? 

Dr.  James.  Of  the  communities  ? 

Senator  Kennedy.  Yes. 

Dr.  James.  We  can  attempt  to  do  that,  Senator,  That  is  a  com- 
puterized answer  that  we  would  have  to  develop,  and  would  involve 
millions  of  calculations.  It  is  a  difficult  thing  to  obtain,  and  we  would 
have  to  obtain  it. 

Senator  Kennedy.  How  can  you  be  sure  that  you  know  and  the 
Department  of  Transportation  does  not  know  ? 

Dr.  James.  I  know  the  size  of  the  problem  and  that  is  what  we  are 
attempting  to  define. 

Senator  Kennedy.  I  have  asked  you  for  specific  testimony  since  you 
have  discredited  the  witnesses,  saying  they  were  speaking  through  their 
hat.  That  is  a  gracious  way  of  putting  it.  Then,  I  asked  you  the  basis 
of  it  and  you  say  they  do  not  understand  this  particular  problem.  I  ask 
you  the  basis  for  your  information  and  you  say  you  have  not  got  it. 
"You  supply  it  and  I  will  ask  the  Department  of  Transportation  to  do 
the  same  thing.  Let  the  record  speak  for  itself, 

Dr,  James.  Let  me  put  it  this  way.  Senator.  What  we  have  is  aggre- 
gate information,  and  what  you  are  asking  for  is  detailed  information. 
The  aggregate  information  (s  that  if  we  Avere  to  attempt  to  get  to  a  65- 
percent  load  factor  today  we  would  have  to  cut  25  percent  off  of  these 
58,000  city-pairs.  I  understand  your  question  to  be  which  of  the  58,000 
would  be  cut. 

Senator  Kennedy.  That  is  right. 

Dr.  James.  We  have  nothing  that  far.  We  have  gone  as  far  as  to  say 
one-fourth  of  them  would  be  cut.  I  do  not  believe  the  Department  of 
Transportation  has  thought  of  it  in  those  terms,  sir. 

Senator  Kennedy.  Well,  I  will  ask  them  the  same  question,  to  submit 
information,  as  I  am  asking  you,  so  if  you  can  supply  information  on 
that  and  be  as  specific  as  possible  I  wiU  ask  them  the  same  question. 

[In  a  letter  dated  February  7, 1975,  the  chairman  of  the  subcommittee 
made  more  explicit  his  request  of  Dr.  James  for  a  list  of  routes  t:hat 
would  be  eliminated  under  the  conditions  discussed  above.  On  April  3, 
1975,  the  Air  Transport  Association  submitted  its  reply  which  totaled 
more  than  200  pages.  The  chairman  then  requested  independent  eval- 


102 

uations  of  this  ATA  study  from  five  leading  economists  and  several 
Government  agencies.  The  ATA  study  and  the  evaluations,  together 
with  relevant  correspondence,  are  printed  at  the  end  of  Dr.  James'  pre- 
pared statement  following  his  testimony  of  this  day,  p.  189  ff.,  below.] 
Senator  Kennedy.  Let  us  continue. 

RELATIVE  DECREASE  IN  AIR  FARES  SINCE  19  38 

Dr.  James.  The  objectives  sought  by  the  theorists  or  the  critics  of 
the  present  system  have  been  accomplished  in  a  regulated  competitive 
environment.  Those  who  have  found  fault  with  the  regulatory  environ- 
ment in  which  air  transportation  now  operates  seek  to  achieve  a  lauda- 
tory goal :  air  transportation  service  at  minimum  and  cost-based  prices, 
providing  a  maximum  efficient  quality  of  service.  We  believe  we  have 
accomplished  that  goal. 

Today  average  scheduled  airline  passenger  fares,  in  1938  dollars,  are 
64  percent  less  than  37  years  ago,  when  Congress  passed  the  Civil 
Aeronautics  Act.  Moreover,  if  one  wishes  to  switch  to  current  dollar 
comparisons,  from  1948  to  1974  the  air  fare  between  New  York  and 
San  Francisco  rose  21  percent.  At  the  same  time  the  price  of  a  pound 
of  roundsteak  increased  100  percent,  a  pair  of  men's  shoes  120  percent, 
a  Chevrolet  automobile  220  percent,  and,  though  perhaps  not  com- 
monly purchased,  a  year's  tuition  at  Harvard  over  640  percent. 

Air  freight  rates  have  similarly  experienced  a  decline  relative  to 
costs  of  all  U.S.  goods  and  services  in  the  period  1946-1974. 

Senator  Kennedy.  With  all  due  respect,  what  has  that  possibly  got 
to  do  with  it?  Television  has  gone  down,  the  cost  of  radio  has  gone 
down,  wristwatches  have  gone  down.  So  what  sense  does  that  particular 
comment  make — how  does  that  prove  your  thesis  ?  I  can  give  as  many 
examples  as  you  have  given  that  have  gone  the  other  way.  I  am  not  an 
expert  in  this,  but 

Dr.  James.  The  only  point  I  am  making,  Senator,  for  every  one  you 
can  give  I  can  give  one  above  the  average.  We  are  standing  with  a 
small  group  of  services  and  products  which  have  actually  declined 
in  this  time  period.  We  are  64  percent  below  the  average,  so  obviously 
there  are  larger  numbers  that  have  gone  up  than  have  gone  down  rela- 
tive to  our  performance. 

Senator  Kennedy.  Maybe  that  is  convincing  to  some  people,  but 
what  we  do  not  know  without  competition  is  how  much  further  it 
would  have  gone  down.  I  would  think  that  would  have  been  the  im- 
portant question.  If  this  is  satisfactory  to  you  as  an  explanation  we 
will  be  glad  to  receive  it. 

Dr.  James.  We  also  can  compare  ourselves  with  consumer  price 
index  and  the  wholesale  price  index,  and  we  will  have  outperformed 
those. 

REGULATED    AND    UNREGULATED    FARES    COMPARED 

Senator  Kennedy.  I  do  not  suppose  you  could  mention  that  the  PSA 
has  gone  down  further  than  you  have,  or  Texas,  so  therefore  they 
demonstrate 

Dr.  James.  Senator,  I  think  PSA  would  be  delighted  to  say  that, 
but  they  cannot.  From  1967-1973  their  i^rices  went  up  23  percent. 
Ours  went  up  17  percent.  Since  1973,  PSA  has  increased  their  prices 
25  percent  and  is  applying  for  10.5  percent  more.  Since  1973,  our  gen- 


eral  fares  are  up  15  percent.  Our  price  record  against  PSA  is  very 
competitive  and  we  beat  them. 

Senator  Kennedy.  Which  makes  the  point  that  competition  does 
not  make  much 

Dr.  James.  They  are  probably  within  a  i^-cent  yield  away 
i'rom  our  average,  and  we  have  three  or  four  fares  that  we  offer  today 
that  are  less  than  what  PSA  offers  on  a  yield  basis. 

Senator  Kennedy.  Well,  the  fares,  as  I  understand,  are  close  to  half 
the  price. 

Dr.  James.  They  are  not,  sir.  Their  yields  are  close  to  6  cents  a  mile 
and  ours  are  running  close  to  7  cents  a  mile,  including  the  charges 
that  have  just  been  made. 

Senator  Kennedy.  Well,  give  me,  just  to  clarify  for  a  layman,  what 
the  fare  is  from  San  Francisco  to  Los  Angeles  for  CAB  regulated 
and  then  the  PSA. 

Dr.  James.  Well,  I  see  the  frame  of  reference  in  which  you  are 
speaking. 

Senator  Kennedy.  Can  you  answer  that  question  for  me  ? 

Dr.  James.  I  have  the  airline  guide  here  and  I  can  probably  pull  out 
that  fare  for  you,  if  you  wish. 

Senator  Kennedy.  OK. 

Dr.  James.  The  yields  I  am  quoting  to  you  are  the  average  of  all  of 
our  fares  against  PSA.  If  you  would  like  I  would  also  like  to  elaborate 
on  that  in  a  moment  as  to  the  differences  of  the  kind  of  service  that 
PSA  is  offering  and  the  different  cost  against  our  own  carriers.  I  can 
do  that  if  you  wish  while  we  are  attempting  to  find 

Senator  Kennedy.  The  point  that  I  was  making  is,  I  did  not  under- 
stand the  relevancy  of  the  increase  in  Harvard's  tuition,  and  then  we 
got  diverted  on  this  other  situation,  so  whatever  you  like,  we  will  just 
put  those  in  the  record  and  you  can  continue. 

Dr.  James.  Senator,  there  is  a  specti-um  of  fares  on  that  route  be- 
tween Los  Angeles  and  San  Francisco.  PSA,  for  example,  has  a  fare 
$20.25.  TWA  has  a  fare  for  $19.50.  Air  West  has  a  fare  for  $18.37, 
Continental  $17. 

Senator  Kennedy.  Are  those  the  intrastate  passengers  ? 

Dr.  James.  Between  Los  Angeles  and  San  Francisco,  yes. 

Senator  Kennedy.  Those  are  traveling  intrastate,  right  ? 

Dr.  James.  Yes. 

Senator  Kennedy.  Say  someone  took  a  plane  from  Boston,  San 
Francisco,  Los  Angeles,  what  would  be  the  cost  of  the  San  Francisco- 
Los  Angeles  rates  ? 

Dr.  James.  Those  would  be  larger. 

Senator  Kennedy.  Give  me  those. 

Dr.  James.  I  will  submit  that  for  the  record  later.  I  do  not  have  it 
with  me  at  this  time. 

Senator  Kennedy.  Well,  it  must  be  in  the  airline  guide.  You  are  the 
experts  on  it. 

You  can  continue  in  your  testimony. 

Dr.  James.  All  right,  sir. 

Senator  Kennedy.  Counsel  informs  me  that  it  is  $38.89. 

Dr.  James.  The  airline  offers  the  public  a  wide  range  of  available 
fares,  and  extensive  use  has  been  made  of  these.  For  the  year  ending 
Sej^tember  1974,  for  example,  use  of  lower  than  full  fares  accounted 


104 

for  almost  one-third  of  all  coach  revenue  passenger  miles  flown.  Be- 
ginning this  month  another  broad  based  discount  fare  has  been  intro- 
duced which  will  provide  an  attractive  bridge  between  charter  and 
regular  fares. 

The  spectrum  of  fares  that  we  offer  has  been  used  extensively  by  low 
income  groups  in  the  United  States.  Last  year  one  of  every  seven 
adults  making  less  than  $7,000  annually  flew  on  a  scheduled  airline. 
Overall,  18  percent  of  all  adults  taking  one  or  more  trips  by  air  made 
less  than  $7,000.  This  pricing  performance,  at  an  adequate  level  of 
service,  either  in  the  long  run  or  in  the  short  run,  could  not  have  been 
matched  by  pricing  in  a  deregulated  environment.  In  fact,  in  the  long 
run,  as  evidenced  by  the  pricng  performance  of  the  U.S.  economy  as  a 
whole,  deregulation  of  the  air  transport  industry  would  have  placed 
prices  and  fares  at  a  much  higher  level  than  now  exists. 

Senator  Kennedy.  Why  is  that  ? 

Dr.  James.  Basing  that  on  the  pricing  performance  of  the  U.S. 
economy  as  a  whole,  which  was  much  higher  in  constant  dollars  in 
1938  than  our  own  performance,  which  was  64  percent  less. 

THE   domestic    PASSENGER   FARE  INVESTIGATION 

More  recently,  we  believe  that  the  Civil  Aeronautics  Board  has 
taken  precedent-setting  steps,  througli  the  results  of  its  Domestic  Pas- 
senger Fare  Investigation,  to  assure  that  the  airline  industry  operates 
at  standards  of  efficiency  responsive  to  consumer  interests.  The  initia- 
tion of  this  investigation  came  from  Members  of  Congress  in  late  1969. 
The  investigation  began  in  January  1970,  and  that  portion  of  it  cover- 
ing fare  level  rate  of  return  procedures  produced  its  first  results  in 
May  1973. 

The  resulting  CAB  standards  of  efficiency  assure  that  no  automatic 
fare  increase  is  charged  to  consumers  for  so-called  industry  cost  mis- 
takes of  purchasing  excess  equipment,  of  misestimating  a  market  and 
hauling  too  few  people,  or  for  giving  away  business  through  discount- 
ing. The  CAB  standards  of  efficiency  adjust  for  all  of  these,  and  no 
fare  change  is  made  until  these  adjustments  have  been  made.  Each 
fare  increase  granted  to  the  industry  since  1973,  including  the  4  per- 
cent increase  granted  last  November,  has  been  based  on  meeting  these 
standards. 

These  CAB  fare  level  procedures,  resulting  from  open  public  hear- 
ings, are  not  arbitrary,  were  not  developed  from  clandestine  meetings, 
and  have  a  clear  and  comprehensive  public  interest  platform  built  in. 
Yet  the  opposite  and  misleading  impression  is  often  given  by  critics  as 
an  emotional  appeal  to  consumers.  As  we  have  shown,  in  fact,  it  is  the 
consumer  who  is  the  primary  beneficiary  of  these  procedures. 

Let  us  turn  our  attention  to  the  question  of  load  factors,  a  concept 
grossly  misunderstood  and  misused.  Continually  our  industry  is  told 
two  things :  ( 1 )  we  are  not  providing  adequate  levels  of  service,  and  (2) 
our  load  factors  should  be  higher.  For  our  industry  these  objectives 
are  contradictory. 

I  believe  I  can  make  my  point  by  referring  to  the  statement  that 
Senator  Kennedy  made  on  the  Senate  floor  on  December  16,  where  he 
referred  to  the  difficulty  a  student  in  Boston  might  experience  in  re- 
turning to  his  home  in  Detroit  because  of  a  lack  of  available  seats  on 
that  route.  Keeping  in  mind  that  the  Civil  Aeronautics  Board's 


105 

domestic  passenger  fare  investigation  established  the  load  factor 
standard  at  55  percent  in  1974,  the  average  load  factor  in  the  Boston- 
Detroit  market  was  59  percent.  Senator  Kennedy  has  cited  an  ex- 
ample of  possible  inadequate  service  at  a  load  factor  of  59  percent.  To 
aA'erage  59  percent,  the  Boston-Detroit  market  shows  a  monthly  load 
factor  range  of  52-67  percent  thus  further  demonstrating  the  season- 
ality of  our  markets. 

Senator  Kennedy.  You  missed  the  point  completely,  because  I  was 
not  really  talking  about  the  load  factor  there,  I  was  talking  about  the 
competition  that  existed  in  that  particular  route  and  pointing  out  that 
there  was  only  one  carrier  traveling  that  route.  There  was  another 
one  that  offered  to  provide  better  service  and,  because  the  Board  had 
refused  to  have  a  hearing,  was  unable  to  do  so.  That  is  the  point  that 
was  made.  I  think  it  is  still  a  valid  one.  If  you  want  to  draw  some  kind 
of  reference  to  the  load  factor  as  being  the  purpose  of  that  comment, 
then  I  am  glad  to  clarify  that  for  you  at  the  present  time,  but  that 
certainly  was  not  the  point  being  made.  There  is  another  carrier  who 
wanted  to  get  in,  offered  more  frequent  and  better  service,  was  never 
granted  a  hearing  and  that  opportunity  is  not  available  to  that  young 
person.  If  you  want  to  argue  with  that  point  I  will  be  glad  to  hear  you. 

Dr.  James.  You  Avere  citing  in  your  statement.  Senator,  that  the 
students,  for  example,  between  Boston  and  Detroit  would  be  unable 
to  get  on  flights  between  certain  periods  of  time  because  of  lack  of 
service  and  the  refusal  of  the  Board  to  add  additional  capacity. 

My  point  is  that  here  is  a  situation  where  apparently  there  was 
insufficient  capacity  and  yet  there  was  a  59  percent  load  factor. 

Senator  Kennedy.  How  many  carriers  are  there  in  that  group? 

Dr.  James.  I  am  not  aware. 

Senator  Kennedy.  Oh,  now,  you  know  how  many  carriers  there 
are.  Ask  your  associates.  There  is  one  carrier,  one  non-stop  carrier. 

Dr.  James.  There  are  lots  of  ways  of  getting  between  Boston  and 
Detroit,  if  you  are  talking  nonstop,  then  there  is  one  carrier. 

Senator  Kennedy.  That  is  right.  OK. 

SMALL   TOWN    SERVICE    (CROSS -SUBSIDY) 

Dr.  James.  What  is  commonly  overlooked  by  observers  of  the  sched- 
uled air  transport  system  system  is  that  30  percent  of  our  domestic 
traffic  is  produced  by  only  70  larger  city-pair  markets;  another  40 
percent  is  derived  from  an  additional  840  markets;  and  the  final  30 
percent  is  produced  in  some  57,000^maller  markets.  Yet,  these  smaller 
markets  are  an  integral  part  of  the  system  and  their  loss  would  seri- 
ouslv  damage  the  adequacy  of  public  air  transport  service,  as  well  as 
invoking  a  severe  cost  to  the  national  economy. 

For  example,  out  of  a  passenger  load  of  85  on  a  typical  flight  from 
Denver  to  Chicago,  over  three-fourths  do  not  originate  in  Denver.  They 
are  coming  from  Pueblo,  Colo. ;  Cheyenne,  Wyo. ;  Great  Falls,  Mont. ; 
Sacramento,  Fresno,  and  San  Jose,  Calif. ;  and  other  cities  in  the  West. 
If  this  feeder  system  were  tampered  with,  the  primary  market  would 
also  became  less  profitable.  As  a  result,  it  would  receive  less  service, 
and  the  remaining  smaller  feeder  markets  woidd  also  receive  less  in- 
direct service. 

Senntor  Kennedy.  Well,  how  can  you  say  that?  I  would  be  inter- 
ested in  your  printouts  on  that  particular  fact.  I  just  know  that  with 


106 

regard  to  my  part  of  the  country,  Air  New  England  provides  many 
more  opportunities  for  the  trunk  carriers  and  the  scheduled  line  car- 
riers to  move  people  than  when  the  major  scheduled  carriers  were 
traveling  down  into  southern  Massachusetts  and  to  other  parts  of  the 
State. 

Dr.  James.  My  example  would  be  that  the  analogy  that  Air  New 
England,  for  example,  is  feeding  into  Boston,  Boston  is  a  major  hub 
serving  to  Los  Angeles  or  San  Francisco.  Flights  out  of  Boston  are 
fed  by  many  of  the  feeders  in  the  New  England  area.  The  profitability 
of  those  hub  routes  depends  to  a  large  extent  on  the  feeder  routes 
coming  into  Boston. 

I  cite  an  example  later  in  the  testimony  concerning  a  flight  coming 
from  the  West,  Fresno  on  through  Denver  and  Chicago  on  which  1 
have  specific  figures  which  I  believe  may  illustrate  the  point  you  are 
looking  for. 

Senator  Kennedy.  What  is  the  point  here  ? 

Dr.  James.  If  you  tamper  with  this  system  that  you  will  begin  to 
close  it  in  on  the  periphery,  that  is  the  feeder  points  would  be  the  ones 
that  would  begin  to  shut  down.  As  they  were  shut  down  it  would 
also  have  an  effect  on  the  hub.  Hub  service  would  be  less,  and  what 
you  are  doing,  because  it  is  a  concentrated  industry,  is  that  you  are 
going  to  end  up  with  only  a  few  markets  served  by  fewer  carriers  and 
the  air  transport  service  will  be  seriously  compromised. 

Senator  Kennedy.  Well,  that  has  not  been  the  experience  in  my 
State.  You  may  be  able  to  document  it  in  other  parts.  I  dare  say  that 
would  not  hold  up  in  New  England.  I  dare  say  it  would  not  in  Cali- 
fornia. There  may  be  other  parts  of  the  country  that  it  would. 

I  would  be  interested  in  what  information  you  have  to  show  that  this 
has  been  the  situation  in  any  of  the  places  where  there  has  been  a  reduc- 
tion of  scheduled  flights,  because  it  certainly  has  not  been  the  case  in 
Boston  or  Massachusetts. 

Dr.  James.  Well,  I  do  not  know  that  we  can  demonstrate  what  the 
impact  would  be  fully  from  our  standpoint  or  the  standpoint  of  those, 
for  example,  that  testified  this  morning. 

Senator  Kennedy.  Well,  then,  how  can  you  make  your  statements 
with  such  assurance  ? 

Dr.  James.  Let  me  make  this  point  first,  if  I  may. 

The  point  I  was  leading  up  to  is  that  we  do  not  have  the  experience  in 
this  country  of  shutting  down  the  air  transport,  systems  to  fully  under- 
stand what  the  impact  would  be  in  these  outlying  districts.  We  have  to 
rely  on  the  evidence  we  now  have  that  shows  the  amount  of  feed  that 
goes  into  a  hub  and  the  importance  of  that  feed  to  the  more  profitable 
routes  that  continue  beyond  and  assume,  then,  that  if  you  were  to  de- 
regulate the  low  density  routes  would  be  the  ones  in  which  service 
would  first  be  dropped,  and  as  it  is  dropped  then  the  public  trpnsnorta- 
tion  network  begins  to  be  compromised  and  there  is  a  chain  reaction 
all  the  way  through  to  the  main  levels  of  the  hubs  in  which  service  is 
dropped  there. 

Senator  Kenne'dy.  I  think  the  best  opportunity  would  be  to  look  to 
places  that  had  certificated  carriers  which  dropped  feeder  service  into 
these  hub  areas.  One  of  the  clearest  examples  is  my  own  area,  where 
Northeast  was  able  to  drop  certain  of  these  routes,  and  after  it  was 
merged  with  Delta,  virtually  all  of  them  were  dropped. 


107 

I  dare  say  the  smaller  lines  have  provided  a  much  greater  degree  of 
service  to  the  public,  and  I  dare  say,  and  I  will  be  glad  to  look  at  the 
statistics,  that  there  is  more  service  feeding  into  the  major  scheduled 
airlines  now  than  when  the  certificated  carriers  were  flying  the  DC-8's 
at  1  o'clock  in  the  morning  in  order  to  meet  with  CAB  requirements. 
We  have  seen  how  Northeast  used  to  fly  down  at  the  most  inopportune 
time  in  the  world,  and  would  be  down  here  4  or  5  months  later  saying 
look,  this  is  all  the  number  of  people  traveling  on  it,  and  trying  to  get 
permission  to  drop  it.  We  saw  instance  after  instance  in  which  they 
were  permitted  to  drop  service.  Now  we  have  been  able  to  see  the  devel- 
opment of  a  variety  of  different  carriers  ser\dng  this  area — from  Bos- 
ton all  the  way  up  the  coast  of  Maine  and  New  Hampshire  and  Ver- 
mont, and  we  find  a  much  more  efficient  and  effective  service,  and 
I  dare  say  the  numbers  would  show  they  are  bringing  many  more 
people  into  the  major  market  areas. 

If  you  are  goin^  to  make  a  statement  categorically  that  deregulation 
would  mean  inferior  service,  this  is  a  statement  that  I  think  ought  to  be 
supported  with  at  least  some  kind  of  figures  or  documentation  showing 
places  where  that  has  been  the  case  in  the  past.  If  you  have  some  we 
would  welcome  it. 

Dr.  James.  Senator,  I  do  not  believe  the  analogy  you  make  neces- 
sarily holds,  because  the  service  that  you  now  have  in  the  New  England 
area  is  still  a  scheduled  certificated  service.  For  example,  the  recent 
certificating  of  Air  New  England  as  a  regional  carrier. 

Senator  Kennedy.  Do  you  know  when  Air  New  England  was 
certificated  ? 

Dr.  James.  Well,  just  within  the  last  month. 

Senator  Kennedy.  We  have  been  flying  it  for  the  last  2i/2  years.  So 
we  can  use  the  figures  before  it  was  certificated  if  you  want.  I  do  not 
want  to  debate  this  point. 

Dr.  James.  Perhaps  your  service  is  well  improved. 

Senator  Kennedy.  I  have  been  very  satisfied  with  it.  If  they  can 
improve  it,  I  am  delighted. 

We  Avill  continue.  If  you  have  any  figures  or  statistics  or  studies  on 
this  particular  point  we  would  welcome  them,  because  obviously  the 
DOT  has  presented  a  statement.  We  will  ask  them  for  their  data  as 
well,  and  if  you  have  some  we  would  like  a  chance  to  examine  it.  You 
must  have  reviewed  this,  and  we  would  like  to  take  a  look  at  it. 

[In  a  letter  dated  February  7,  1975,  the  chairman  of  the  subcommit- 
tee made  more  explicit  his  request  of  Dr.  James  for  a  list  of  routes  that 
would  be  eliminated  under  the  conditions  discussed  above.  On  April  3, 
1975,  the  Air  Transport  Association  submitted  its  reply  which  totaled 
more  than  200  pages.  The  chairman  then  requested  independent  evalu- 
ations of  this  ATA  study  from  five  leading  economists  and  several 
Government  agencies.  The  ATA  study  and  the  evaluations,  together 
with  relevant  correspondence,  are  printed  at  the  end  of  Dr.  James' 
prepared  statement  following  his  testimony  of  this  day,  p.  139  ff. 
below.] 

Dr.  James.  Fine. 

the  interline  network  of  airlines 

Some  claim  that,  if  the  present  system  were  deregulated  and  present 
carriers  elected  to  leave  the  smaller  markets,  commuter  carriers  or 
forms  of  ground  transportation  would  be  adequate  substitutes.  Data 


108 

developed  by  Dr.  Gary  Fromm,  formerly  of  Data  Resources,  Inc., 
would  indicate  differently.  The  value  of  an  hour's  time  to  an  air 
traveler  is  approximately  $10.50.  Taking  into  account  the  slower  tinies 
for  accomplishing  the  same  trip  by  rail,  bus,  auto  or  lower  speed  air- 
craft, the  cost  to  individuals  and  therefore  to  the  economy  could 
approach  billions  of  dollars. 

The  replacement  of  many  of  these  markets  by  smaller  earner  opera- 
tions would  be  a  hazardous  one.  For  example,  in  1972,  of  all  U.S. 
cities  receiving  scheduled  passenger  commuter  service,  74,  or  17  per- 
cent were  abandoned  1  year  later  and  service  was  added  to  another 
104.  Thus,  in  that  time  period  178  cities  experienced  a  change  in 
scheduled  commuter  service— roughly  one-third  of  all  cities  receiving 
such  service. 

The  present  air  transport  system  represents  a  wholly  integrated  net- 
work of  scheduling,  connections,  interlining,  and  routing  among  and 
between  carriers  serving  cities  of  varying  size  and  geographic  prox- 
imity to  each  other.  A  glance  at  the  Official  Airline  Guide  (which 
contains  the  schedules  for  the  entire  air  transport  network)  provides 
dramatic  evidence  of  this  point.  For  example,  the  OAG  (North 
American  edition)  published  on  February  1,  1975,  is  898  pages  long. 
It  depicts  the  schedules  of  every  scheduled  carrier  in  North  America, 
to  and  from  virtually  every  community  served,  with  connections  indi- 
cated. It  is  this  network  which  would  be  jeopardized  by  drastically 
revising  or  dismantling  the  structure  so  carefully  constructed  over 
the  last  37  years. 

The  airline  industry  believes  that  the  regulatory  environment  within 
which  we  operate  has  served  the  public  interest  well.  We  believe  the 
results  support  that  conclusion. 

However,  in  certain  instances,  airlines  have  opposed  and  continue 
to  oppose  the  manner  in  which  the  regulatory  process  has  been  carried 
out.  And  we  believe  that  certain  areas  of  economic  regulation  of  our 
industry  do  require  increased  attention. 

For  example,  the  problem  of  regulatory  lag  is  endemic  to  the  regu- 
latory process  throughout  much  of  government.  There  are  areas  here 
where  productive  changes  can  be  made.  The  proper  requirement  for 
full  and  complete  industry  reporting  of  economic,  financial,  and  sta- 
tistical data  need  not  result  in  duplicate  and  redundant  effort  on  the 
part  of  the  industry  or  the  regulator.  We  believe  reasonable  cost- 
benefit  analysis  can  be  usefully  applied  to  certain  of  these  requirements. 

We  also  believe  that  the  precedent-setting  step  of  establishing  per- 
formance and  efficiency  standards  for  the  industry  should  be  subject 
to  regular  scrutiny  by  the  Board  and  amended  when  and  as  required 
in  the  public  interest.  These  should  be  done,  however,  always  keeping 
in  mind  the  need  for  continuing  understanding  on  the  part  of  the 
public  and  the  government  of  the  real  world  economics  of  the  air 
transport  system. 

We  also  believe  that  the  undertaking  by  the  Civil  Aeronautics  Board 
of  a  comprehensive  review  of  route  developement  policy  is  desirable. 
Careful  consideration  should  be  given  to  the  view  contained  in  an 
October  1974  report  by  the  Board  that :  "*  *  *  regulatory  route  and 
route-related  policies  should  be  directed  to  improving  the  efficiency 
and   quality   of   the   system,   through   careful   expansion   of   route 


109 

authority  when  required  by  traffic,  and  through  route  rationalization." 

We  are  also  in  favor  of  selected  changes  in  the  tariff  procedures.  We 
would  advocate  extending  the  filing  deadline  for  tariffs  from  30  to  45 
days  with  Board  decision  required  after  30  days.  This  process  would 
provide  15  days  advance  public  notice  of  tariff  changes.  A  corollary  of 
this  would  be  the  adoption  of  a  simplified  short -form  tariff  which 
would  work  to  enhance  public  understanding  of  a  given  tariff  change. 

In  conclusion,  the  kinds  of  changes  we  feel  are  worthy  of  con- 
sideration are  those  which  would  tend  to  improve  upon  the  present 
system,  and  not  destroy  it  or  affect  its  present  high  level  of  perform- 
ance. The  legulated  competitive  environment  of  the  air  transport 
system  has  not  only  fulfilled  all  of  the  objectives  of  an  unregulated 
environment  and  has  been  truly  responsive  to  public  service  needs. 

The  record  of  the  air  transport  industry  shows :  (1)  that  we  are  not 
high  priced;  (2)  we  are  consumer-responsive;  (3)  we  offer  a  high 
quality  of  service;  (4)  we  are  innovative  and  have  introduced  a  high 
degree  of  technology;  and  (5)  we  maintain  an  extensive  network  of 
public  service. 

We  believe  that  there  is  no  way  that  a  major  overhaul  of  the  regula- 
tory structure  of  air  transportation,  let  alone  deregulation,  could 
improve  on  this  record. 

Thank  you,  sir. 

I  am  open  to  additional  questions,  if  you  wish. 

FARE   FLEXIBILITY 

Senator  Kennedy.  Mr.  Beyer  will  ask  some  questions,  but  before 
we  get  to  that,  what  was  your  reaction  to  some  of  the  proposals  made 
this  morning  by  the  DOT  in  terms  of  price  flexibility,  for  example, 
that  permit  at  least  some — I  think  they  talk  about  zone  of  flexibility. 

Dr.  James.  This  is  the  zone  of  reasonableness  ? 

Senator  Kennedy.  In  terms  of  rates. 

Dr.  James.  Yes,  sir. 

The  carriers  are  divided.  There  will  be  carriers  who  might  show 
some  interest  in  that,  many  others  who  would  not.  I  am  not  in  a  posi- 
tion to  give  a  unified  industry  answer  to  it  except  to  say  that  one  does 
have  to  examine  what  the  purpose  would  be.  It  is  the  purpose  to 

Senator  Kennedy.  Well,  I  suppose  the  purpose  is  to  permit  some- 
body w^ho  wants  to  fly,  as  I  did  last  Thursday,  from  Washington  to 
San  Francisco,  to  go  for  $100  instead  of  $200. 

Dr.  James.  Yes,  sir.  We  have  introduced  just  this  month  the  op- 
portunity for  you  and  others  who  so  wish  to  use  it  to  fly  at  discount 
rates  at  those  distances,  and  in  effect  we  would  view  that  as  part  of  the 
zoning. 

Senator  Kennedy.  With  regard  to  that  point,  you  are  generally  ac- 
cepting that  proposal  that  they  mentioned  there.  As  I  understand  from 
what  you  are  saying  now,  you  have  no  real  problem  with  it. 

Dr.  James.  What  I  am  saying  at  this  point,  Senator,  is  that  in  many 
ways  the  present  practice  is  meeting  the  objective  that  you  are  seeking. 

Senator  Kennedy.  Well,  if  they  do  not — then,  if  it  is  meeting  the  ob- 
jective and  you  are  saying  that  has  all  ready  been  done,  then  I  under- 
stand you  are  in  general  support  of  it.  You  say  that  has  already  been 
done,  it  is  not  necessary 


110 

Dr.  James.  I  am  in  general  support  of  the  wide  variety  of 
fares  which  the  industry  offers  the  public,  which  are  in  varying 
combinations. 

Senator  Kennedy.  If  you  say  they  are  all  ready  doing  it  what  is 
your  reluctance  to  support  it?  I  do  not  understand  it.  You  say  they 
are  already  doing  it,  you  are  in  support  if  they  are  already  doing  it. 
You  cannot  have  it  both  ways. 

Dr.  James.  I  guess  what  I  am  really  saying,  Senator,  is  that  if  we 
are  already  doing  it  one  way  and  accomplishing  the  objective  a  second 
way,  why  do  it  the  second  way  ? 

Senator  Kennedy.  Well,  then  you  are  against  jt  ? 

Dr.  James.  I  am  not  in  a  position  to  represent  an  industry  view,  sir. 

Senator  Kennedy.  What  is  your  own  personal  view  ? 

Dr.  James.  That  we  are  already  meeting  a  zone  of  reasonableness 
by  the  variety  of  fares  that  we  are  offering  the  public. 

Senator  Kennedy.  This  is  not  different  from  your  industry  view? 

Dr.  James.  It  is  not  different  from  our  industry  practice.  The  in- 
dustry view  would  be  different  from  the  industry  practice,  depending 
upon  the  spectrum  of  answers  to  the  questionnaire  that  you  have  on 
this  same  subject. 

Senator  Kennedy.  That  makes  it  very  clear. 

freer  route  entry 

How  about  freer  entry  into  the  market  area  ?  You  say  the  admin- 
istration strongly  supports  liberalization  of  entry  into  the  airline  in- 
dustry and  the  proposal  provides  substantial  entry  and  exit 
liberalization. 

Dr.  James.  Yes,  we  feel  very  strongly  that  if  you  had  complete 
freedom  of  entry  in  these  markets  that  only  the  larger  more  profitable 
markets  would  survive  and  only  a  few  carriers  would  survive,  and  the 
value  we  now  have  in  the  total  58,000  city-pair  markets  would  be 
destroyed,  and  it  would  not  be  too  long  until  we  find  that  our  ability 
to  get  more — to  get  service  between  more  than  70  to  200  pairs  out  of 
this  58,000  would  be  a  reality.  We  would  not  be  able  to  get  more  serv- 
ice than  that. 

Senator  Kennedy.  Well,  how  do  you  respond  to  the  points  that  were 
given  this  morniup;  that,  if  some  carriers  diop  by  the  wayside  because 
they  are  poorly  administered,  they  do  so  because  they  are  inefficient? 
There  are  others  that  can  run  an  airline  better.  "Why  do  they  not  hove 
the  ability  to  come  in  and  offer  a  price  and  service  to  the  public 
that 

Dr.  James.  I  simply  do  not  accept  the  fact  that  we  have  as  a  group, 
a  poorly  managed  airline.  Between  1969  and  1974,  we  have  reduced 
our  employees  3i^  percent.  At  the  same  time  we  increased  our  volume 
of  traffic,  passengers  hauled  by  20  percent,  passenger-miles  by  30 
percent. 

Senator  Kennedy.  If  they  are  doing  such  a  good  job  what  do  they 
have  to  fear  from  anybody  coming  in  ? 

Dr.  James.  The  thing  you  have  to  fear  is  the  loss  of  some  57,000 
city-pair  services. 

Senator  Kennedy.  Why  do  you  say  that?  You  say  they  are  all  doing 
a  complete  job,  are  not  overpriced,  arc  consumer  responsive  and  innova- 


Ill 

tive  and  give  extensive  public  service,  so  what  should  they  have  to 
fear  ?  It  seems  to  me  the  people  who  have  something  to  fear  are  the 
people  who  are  sticking  their  neck  out. 

JJr.  James.  Sir,  I  think  it  is  the  public,  the  Government  that  should 
have  the  fear,  the  fear  that  the  public  service  to  all  of  these  city-pairs 
will  be  destroyed  or  effectively  compromised.  The  surviving  carriers 
in  this  should  have  nothing  to  fear,  but  there  would  be  few  of  them 
serving  very  few  markets. 

Senator  Kennedy.  At  a  lower  price,  I  suppose  ? 

Dr.  James.  Xot  necessarily,  because  if  you  compare  our  price  per- 
fonnance  over  the  past  30  yeare,  we  are  marketing  better  than  the 
economy.  That  is,  better  in  the  sense  that  we  are  priced  lower  rela- 
tively to  them. 

Senator  Kennedy.  We  are  back  to  the  question  of  whether  fares 
might  not  be  even  less  if  you  had  competition  or  free  entry. 

It  reminds  me  of  the  patient  who  had  a  temperature  of  101  and  his 
temperature  was  98  one  day  and  went  up  to  101  the  next  and  102  the 
next,  and  the  doctor  said  you  are  getting  better  because  you  are  getting 
sicker  more  slowly. 

How  do  you  know  if,  with  competition,  you  might  not  be  doing 
better,  even  further  below  the  national  average  ? 

Dr.  James.  I  think  my  answer  would  be  this.  Could  anyone  say 
that  we  could  do  better — I  do  not  think  we  could — but  let  us  assume 
that  we  did,  on  70  markets,  and  with  two  or  three  carriers,  at  the  cost 
of  serving  the  rest  of  the  network  that  now  exists.  If  they  think  we 
would  improve  then  they  are  overlooking  the  cost,  the  cost  to  the  public 
in  particular. 

Senator  Kennedy.  We  will  never  know,  though,  if  we  follow  your 
position,  because  you  Avould  not  permit  or  at  least  not  encourage  new 
entry  of  other  carriers  into  the  market.  The  way  that  I  understand 
your  answer  is  that  nothing  would  b3  more  disastrous  for  the  whole 
traveling  piiblic  than  if  you  opened  it  up  to  any  kind  of  competition. 
If  we  follow  your  testimony,  we  will  have  no  way  of  knowing,  will  we? 

Dr.  James.  I  think  in  response  to  that  question,  it  is  well  advised  to 
keep  in  mind  that  those  who  advocate  tliis,  as  they  essentiaPy  did  this 
morning,  were  also  in  extreme  wonderment  as  to  just  whether  or  not 
you  could  go  through  this  transition  and  not  effect  the  city  service  that 
we  now  have.  Many  questions  were  raised  on  their  part  as  well. 

Senator  Kennedy.  1  raised  most  of  them. 

Dr.  James.  You  did,  and  I  appreciate  that. 

CAB  authority  TO  IMMUNIZE  INTERCARRIER  AGREEMENTS  FROM  THE 
ANTITRUST   LAWS 

Senator  Kennedy.  What  about  the  antitrust  immunity?  How  do 
you  stand  on  that  ? 

Dr.  James.  I  would  like  to  refer,  if  I  may,  to  our  chief  legal  counsel, 
Mr.  Landry. 

]Mr.  Landry.  Thank  you,  Mr.  Chairman. 

If  I  could  just  add  one  comment  to  what  Dr.  James  has  been  saying 
about  the  consequences  of  free  entry  as  to  what  would  hapj^en.  As  he 
has  emphasized,  you  have  70  markets  equalling  the  support  from 
57,000  city-pairs.  That  fact  reminds  you  of  what  Willie  Sutton  said 


112 

when  they  asked  him  why  he  robbed  banks.  He  said  tliat  is  where  the 
money  is.  The  entrants  would  go  to  the  70  markets,  that  is  where  the 
money  is. 

Senator  Kennedy.  I  hope  there  will  be  one  between  Boston  and 
Washington. 

Mr.  Landry.  If  I  may  get  to  the  other  question,  the  system  under 
414,  I  believe  it  would  be  a  mistake  and  a  serious  mistake  from  the 
consumer  point  of  view  to  do  away  with  the  antitrust  immunity,  to  do 
away  with  section  414.  There  is  a  tremendously  integrated  network  with 
some  24  carriers  serving  this  host  of  markets  in  which  a  number  of 
efficiencies  and  cost  savings  are  brought  about  through  intercarrier 
agreements.  Those  agreements  would  not  be  formulated  if  the  carriers 
were  fearful  of  the  very  drastic  consequences,  particularly  now  under 
the  new  law,  of  the  antitrust  violations. 

I  am  not  saying  these  agreements  are  worked  out  in  smoke-filled 
back  rooms  or  anything  of  that  sort.  They  are  worked  out  in  the  open, 
in  front  of  the  observers  of  the  Civil  Aeronautics  Board,  the  Depart- 
ment of  Justice,  the  Department  of  Transportation.  I  have  had  the 
privilege  in  the  last  week,  for  example,  to  play  host  to  a  very  dramatic 
effort  of  carriers  around  the  world  to  try  to  cope  with  the  escalating 
price  of  fuel.  Some  75  carriers  have  gathered  together  to  see  if  they 
could  formulate  some  joint  actions  that  might  bring  the  price  of  fuel 
down,  to  the  benefit  of  the  consumers.  Those  carriers  held  a  giant 
meeting  last  week,  observed  from  beginning  to  end  by  the  Civil 
Aeronautics  Board,  DOT  was  present  throughout,  and  the  Depart- 
ment of  Justice  had  the  opportunity  to  be  there.  But  in  any  event, 
any  agreement  that  comes  out  of  that  will  only  go  into  effect  if  ap- 
proved by  the  Civil  Aeronautics  Board.  Under  the  holding  in  the 
local  cartage  case,  the  CAB,  if  it  sees  anticompetitive  effects,  it  is  not 
going  to  approve  any  such  agreement  unless  it  positively  and  affirma- 
tively finds  this  the  only  way  to  meet  a  serious  transportation  need 
or  to  secure  important  public  benefits.  So,  I  think  all  in  all  this  is 
very  close  scrutiny.  And,  the  system  is  working. 

Senator  Kennedy.  Do  they  keep  transcripts  of  those  meetings? 

Mr.  Landry.  Minutes  are  being  given  to  the  Civil  Aeronautics 
Board  and  they  are  public.  And,  they  allow  interested  persons  to  come 
in  and  address  the  meetings. 

Senator  Kennedy.  Would  you  support  keeping  transcripts,  as  we 
do  here  in  the  Senate? 

Mr.  Landry.  In  some  cases  they  have  transcripts. 

Senator  Kennedy.  Can  you  see  any  reason  why  they  should  not  keep 
transcripts?  You  just  talked  about  how  open  the  meeting  was.  Do 
you  have  any  reason  why  transcripts  should  not  be  kept? 

Mr.  Landry.  In  this  case — if  transcripts  were  made  available  to  the 
oil  companies.  I  imagine  that  the  dinlog  would  not  be  quite  as  free 
as  it  would  be  absent  such  a  transcript.  But  full  minutes  are  being 
submitted  to  the  CAB  today,  as  a  matter  of  fact. 

Senator  Kennedy.  You  really  cannot  have  it  both  ways.  I  think  up 
to  this  year  the  Congress  was  one  of  the  biggest  offenders.  We  have 
executive  sessions  from  which  the  public  was  excluded,  and  conferences 
with  the  House  of  Eepresentatives  in  most  instances  were  closed.  That 
has  gone  on  for  some  time.  It  was  generally  felt  that  if  we  opened  up 
these  meetings,  either  the  Members  themselves  would  be  fighting  a 


113 

losing  battle  in  front  of  the  press  and  the  various  kinds  of  interested 
groups,  or  that  there  would  be  a  distortion  of  the  legislative  process. 
But  it  has  been  demonstrated,  and  I  think  quite  effectively,  that  this  is 
not  the  case  in  the  number  of  committees  which  have  held  the  open 
executive  sessions  in  considering  extremely  important  matters  of 
policy. 

I  am  just  wondering  why  we  should  not  have  these  airline  meetings 
open,  or  maintain  transcripts ;  what  reluctance  you  would  have  to 

Mr.  Landry.  Mr.  Chairman,  I  think  in  this  particular  set  of  discus- 
sions that  I  am  talking  about,  I  think,  it  is  unique  in  not  having  them 
open  with  a  transcript. 

Senator  Kennedy.  Do  you  think  they  should  be  open  with  tran- 
scripts unless  there  is  going  to  be  a  vote  taken  by  participants  to  close 
it? 

Mr.  Landry.  No  ;  I  believe  that  the  discussions,  for  example,  capacity 
discussions  and  so  forth,  have  had  consumer  groups  represented 
throughout  the  discussions.  I  believe  they  have  been  fully  open  to 
members  of  the  general  public  and  have  been  held  in  that  kind  of  gold- 
fish bowl  without  any  adverse  consequences. 

Senator  Kennedy.  Come  on,  do  you  favor  keeping  transcripts,  or  do 
you  not  ? 

Mr.  Landry.  There  were  transcripts,  I  believe,  of  those  capacity  dis- 
cussions and  any  discussions  of  that  nature.  So  I  say  about  90  percent 
of  the  time 

Senator  Kennedy.  It  is  the  other  10  percent  that  we  want  to  get.  The 
minimum  charter  discussions  that  we  had  last  fall,  I  think  the  tran- 
script of  that  meeting  would  have  been  fascinating. 

Mr.  Landry.  I  am  not  sure  of  the  ground  rules  for  those  discussions 
as  to  whether  there  was  a  transcript.  I  do  not  know. 

GENERAL   FARE    INCREASES    IN    PREVIOUS    YEARS 

Mr.  Breyer.  a  couple  of  minor  questions. 

First,  I  would  just  like  to  clarify  this,  because  we  are  making  an 
effort  to  keep  our  statistics  accurate,  I  have  gone  over  your  prepared 
testimony.  I  was  a  little  bit  disturbed  because  you  stated  that  contrary 
to  what  Senator  Kennedy  said — contrary  to  the  December  16  state- 
ment— last  year  the  domestic  airlines  were  granted  fare  increases  total- 
ing 10  percent.  I  went  back  and  checked  that  again  and  I  think  we 
were  accurate  on  that,  were  we  not  ? 

The  CAB,  on  December  16,  granted  a  5  percent  increase.  It  granted 
a  6  percent  increase  in  April  1964  and  there  was  a  4  percent  increase 
in  April  1974.  Then,  specifically  referred  to  in  the  speech,  the  CAB 
phased  out  discount  fares  which  amounted  to  a  5.4  percent  increase. 
These  total  19.4  percent.  Senator  Kennedy  described  the  increases  as 
"nearly  20  percent." 

So  I  would  appreciate  your  going  over  your  statement  because  we  are 
making  an  effort  to  be  accurate.  I  do  not  think  what  the  Senator  said 
is  contrary  to  the  facts. 

Dr.  James.  We  think  by  putting  the  discount  fare  changes  in  you 
are  mixing  apples  and  oranges,  which  is  something  many  others  have 
done  as  well.  If  you  talk  about  the  5  and  the  6  and  the  4,  the  15  for  the 
3  general  air  fare  increases,  you  are  talking  about  the  impact  we 


51-146    O  -  76  -  pt.  1 


114 

had  on  the  normal  traveler.  If  you  are  talking  about  the  discount  fares, 
they  affected  the  family  fare  traveler  and  the  youth  traveler.  To  many 
that  change  was  almost  as  much  as  40  percent  because  it  was  going  from 
66  to  75  percent  of  full  fare  up  to  full  fare  over  three  stages. 

Now,  in  turn,  however,  he  now  has  available,  beginning  this  month, 
20  to  25  percent  off.  So  the  change  to  many  perhaps  is  only  10  or  15 
percent  increase.  The  change  to  the  average  nondiscount  traveler,  the 
general  fare  increases  then  are  15  percent  in  that  time  period. 

Mr.  Breyer.  The  CAB  gave  us  that  number.  I  would  appreciate 
it  if  you  would  check  it  out. 

Dr.  James.  The  difference  is  whether  or  not  you  should  have  in  the 
calculations  the  discount  fare  changes  which  are  really  yield  changes. 

SMALL   TOWN    SERVICE    ( CROSS-SUBSIDY ) 

Mr.  Breyer.  I  just  want  to  stress  a  point  that  I  had  some  difficulty 
understanding.  I  am  not  certain  what  argument  you  are  making  when 
you  talk  about  the  complexity  of  the  network.  I  think  at  some  point 
what  you  are  saying  is  that  there  are  a  lot  of  unprofitable  routes  that 
are  being  subsiaized  by  other  profitable  routes.  Now,  if  that  is  the 
case,  what  is  interesting  to  me  about  that  is  the  Department  of  Trans- 
portation and  the  Council  of  Economic  Advisers  and  people  who  seri- 
ously studied  the  matter  for  a  number  of  years  argue  that  there  is 
not  any  substantial  cross-subsidy.  If  in  fact  you  did  have  more  competi- 
tion you  would  still  get  those  little  towns  served,  maybe  not  every 
one,  but  certainly  most  of  them,  perhaps  by  commuter  airlines.  But 
you  state  the  contrary  is  true. 

What  I  would  like  to  ask  you  to  do  is  to  substantiate  that  claim, 
come  up  with  lists  of  costs  or  lists  of  those  towns  that  would  be  cut 
off.  Can  you  prepare  this  computer  printout  or  whatever  cost  studies 
are  necessary,  because  we  have  cost  studies  on  one  side  and  I  think  it 
would  be  helpful  to  have  them  on  the  other. 

Dr.  James.  I  believe  there  are  two  questions  there,  one  on  cross- 
subsidy  and  our  ability  to  produce  this  feeder  information. 

On  the  cross-subsidy,  I  believe  that  that  is  a  concept  that  has  been 
misused  on  many  occasions,  and  I  would  cite  this,  that  if  you  take  the 
flight  that  we  have  from  Fresno  to  Denver  to  Chicago,  and  we  have 
27  passengers  that  are  coming  from  Fresno  to  Denver  that  continue 
on  to  Chicago.  Now,  they  are  on  that  major  hub  that  is  often  looked 
upon  as  subsidizing  the  smaller  feed  route  that  they  just  came  on. 
So  they  are  in  effect  subsidizing  themselves  if  you  call  it  cross-subsidy. 

Now,  what  about  the  passengers  who  are  on  that  flight  who  did 
indeed  originate  in  Denver  and  go  to  Chicago.  Are  they  subsidizing 
those  who  were  fed  into  Denver.  Well,  I  believe  you  can  look  upon 
that  as  if  they  are  not,  because  what  is  happening  there  is  that  they 
are  getting  a  higher  level  of  service  than  they  would  have  gotten 
without  the  feeding  routes  coming  into  Denver. 

Mr.  Breyer.  What  I  am  asking  is  that  you  make  a  serious  effort  to 
prepare  the  documentation  that  would  bear  out  the  statement.  In  Cali- 
fornia they  have  a  competitive  system  and  feeder  routes,  as  well.  Nore- 
theless,  you  think  if  there  were  freer  entry  the  feeder  systems  would 
be  destroyed.  I  am  asking  for  the  subcommittee  if  you  could  submit 
documentation. 


115 

Dr.  James.  All  right,  sir.  We  will  make  that  effort.  I  might  indicate 
that  you  will  find  tnere  are  other  sources,  and  among  them  larger  air- 
craft manufacturers  who  have  studied  the  same  problem,  and  it  is 
very  possible  that  they,  too,  could  produce  information  along  this  line. 
We  perhaps  can  lurnish  a  list  to  you  of  tliose  who  may  liave  such 
information  available. 

Mr.  Breyer.  I  think  it  is  relevant  to  the  question.  For  example,  you 
have  often  talked  about  the  need  for  regulation  to  provide  public  serv- 
ice. This  is  perhaps  a  different  question.  You  say  "adequate  public  serv- 
ice." In  California  there  is  a  choice  between  adequate  public  service 
supplied  by  a  regulated  line  and  unregulated  lines.  If  you  look  at  the 
PSA  figures,  a  line  that  is  not  subject  to  CAB  regulation  you  find  that 
far  more  people  fly  on  PSA  in  California  than  on  scheduled  service. 
When  people  seem  to  be  given  that  choice  they  seem  not  to  take  the 
scheduled,  CAB-regulated  service. 

Dr.  James.  We  think  there  is  a  lot  that  needs  to  be  illuminated  be- 
tween interstate  and  intrastate  operations,  and  we  of  course,  and  some 
of  the  carriers  as  well,  will  be  participating  in  your  February  14  hear- 
ing in  Boston. 

Mr.  Breyer.  This  afternoon  is  not  meant  to  fully  expose  the  indus- 
try's position.  We  hope  this  morning's  testimony  will  focus  the  dis- 
cussion. Anybody  in  the  industry  who  wishes  to  present  documentation 
is  invited  to  present  it  in  written  form  even  if  they  do  not  testify 
orally. 

Dr.  James.  Fine. 

Senator  Kennedy.  I  want  to  thank  you  very  much  for  coming. 

I  think  Mr.  Breyer  indicated  we  are  looking  forward  to  the  testi- 
mony of  the  airlines  themselves  and  working  with  you  and  we  want 
to  tell  you  how  much  we  appreciate  your  presence  here  and  response  to 
the  questions. 

We  will  recess  until  next  week. 

The  subcommittee  stands  adjourned. 

[Whereupon,  at  4 :05  p.m.,  the  subcommittee  was  adjourned.] 

[The  prepared  statement  of  Dr.  James  follows :] 

Prepared  Statement  of  Dr.  George  W.  James,  Air  Transport 
Association  of  America 

My  name  is  George  W.  James,  I  am  Senior  Vice  President  of  Economics  and 
Finance  of  the  Air  Transport  Association  of  America,  which  represents  virtually 
all  of  the  U.S.  scheduled  airlines.  I  am  accompanied  by  Mr.  James  Landry,  ATA 
General  Counsel,  and  Mr.  Gabriel  Phillips,  ATA  Vice  President-International. 

Because  our  industry  and  the  public  it  serves  are  directly  and  comprehensively 
affected  by  the  regulatory  environment  established  by  Congress,  we  welcome  the 
attention  being  focused  on  this  subject — in  these  hearings,  and  elsewhere  on  the 
part  of  the  Congress,  the  executive  branch  and  the  public. 

As  you  stated  on  December  16,  Mr.  Chairman,  the  basic  objective  of  airline 
regulation  is  adequate  service  at  reasonable  prices.  We  believe  airline  regulation 
has  met  that  test.  Nevertheless,  we  believe  that  consideration  by  this  panel  and 
others  of  the  issue  of  regulatory  reform  presents  opportunities  not  only  for 
thorough  review  of  the  existing  structure  and  procedures,  but — more  important — 
for  seeking  improvements  in  regulation.  These  improvements  can  lead  to  an  even 
more  effective  and  responsive  public  air  transportation  system. 

The  regulatory  environment  within  which  airlines  have  operated  since  1938 
has  resulted  in  "the  most  comprehensive  air  transportation  network  in  th3 
world."  This  is  pointed  up  by  the  fact  that,  in  1974,  the  scheduled  airlines,  with 
30,000  employees,  operated  a  modern  fleet  of  2,400  aircraft  on  13,000  flights  daily, 
and  carried  208  million  passenger's   (representing  about  75  percent  of  intercity 


116 

common  carrier  passenger  miles ) ,  3.3  million  tons  of  freight,  and  16  billion  pieces 
of  mail.  Further,  in  19.4  this  industry  transported  six  million  more  passengers 
than  in  1973,  and  used  about  one  billion  gallons  less  fuel  in  the  process.  These 
facts  demonstrate  clearly  the  size,  importance,  and  public  responsibility  of  the 
scheduled  airlines  within  the  $60  billion  U.S.  travel  industry. 

Dominating  the  1974  economic  picture  for  the  airlines,  as  for  the  nation,  was 
the  combined  impact  of  the  energy  crisis,  inflation,  and  recession.  Contrary  to 
your  December  16  statement,  Senator  Kennedy,  last  year  the  domestic  airlines 
were  granted  general  fare  increases  totalling  10  percent.  Another  5  percent  had 
been  granted  in  December  1973.  These  fare  increases  were  exceeded  by  inflation 
in  airline  costs  of  more  than  20  percent,  including  the  more  than  doubling  of  per 
gallon  fuel  cost  during  the  year.  The  fact  is  that  additional  revenues  provided  by 
the  April,  1974  fuel-related  domestic  fare  increase  and  the  fuel-related  portion  of 
the  4  percent  mid-November  increase  to  which  you  have  referred  will  total  about 
$400  million,  as  compared  to  the  1974  domestic  fuel  cost  increase  alone  of 
about  $700  million — a  shortfall  of  $300  million.  Yet,  despite  the  massive  chal- 
lenges which  have  confronted  our  industry  during  the  past  year,  our  record 
of  public  service — providing  quality  transportation  at  reasonable  fare  levels  to 
meet  the  needs  of  the  traveling  and  shipping  public — has  remained  strong. 

Simply  put,  the  experience  of  37  years  of  regulated  competition  has  resulted 
in  an  air  transportation  network  bringing  adequate,  integrated,  and  reliable 
public  transport  service  to  540  U.S.  airports  serving  thousands  of  communities, 
at  reasonable  and  cost-related  prices — as  a  matter  of  fact,  the  best  transportation 
system  in  the  world. 

This  industry  has  come  a  long  way  since  1938,  and  the  regulatory  environment 
within  which  it  has  operated  played  a  key  role  in  this  development.  The  CAB 
and  the  private,  competing  airline  managements  have  worked  within  the  frame- 
work of  regulated  competition  established  by  Congress  to  furnish  the  American 
people  this  unparalleled  system  of  transportation,  a  system,  we  believe,  that 
would  not  have  been  possible  except  through  a  balance  between  regulation  and 
competition  in  the  industry. 

Regulated  Competition 

The  system  of  air  transportation,  since  its  inception  as  an  effective  force  in 
the  American  economy  in  the  late  1930's,  has  been  founded  on  the  principle  of 
regulated  competition.  This  has  been  necessary  because  of  the  special  position 
of  public  transportation  in  the  economy.  In  the  spectrum  of  economic  activity, 
from  a  natural  monopoly  to  perfect  competition,  transportation  falls  in  between. 

Unlike  certain  specific  public  utilities  in  which  embedded  costs  are  immense 
and  therefore  economies  of  scale  so  apparent  ^  that  they  may  be  characterized 
as  natural  monopolies,  components  of  air  transportation  are  conducive  to  com- 
petition. While  the  cost  of  equipment  and  facilities  is  high,  and  rising,  airlines 
are  by  their  nature  mobile.  More  important,  airlines  are  embedded  in  the  essen- 
tially competitive  structures  of  market  economics,  requiring  efficient  and  adapt- 
able management  to  compete  effectively  against  unregulated  business  for  capital 
in  the  marketplace.^  Thus,  competition  has  properly  played  a  key  role  in  the 
development  of  U.S.  air  transportation. 

Still,  air  transportation  cannot  be  placed  in  the  perfect  or  workable  competi- 
tive environment  since,  as  historical  experience  has  shown,  without  degrees  of 
government  regulation  of  competition,  public  service  industries  have  become 
inadequate.  Nor  can  it  be  expected  that  abolishing  of  regulation  would  lead  to 
the  best  allocation  of  air  transportation  resources. 

The  Elements  of  Air  Transportation  Regxilation 

Air  transport  regulation  can  be  viewed  as  having  essentially  four  basic 
objectives : ^ 

1.  Prevent  unreasonable  prices  which  produce  excessive  earnings  ; 

2.  Ensure  profits  suflScient  for  the  development  and  expansion  of  the  industry; 

3.  Assure  that  a  wide  variety  of  services  are  offered  to  the  public ; 

4.  Maintain  certain  types  of  directly  unremunerative  services  that  serve  a 
broad  public  need. 


-  Me^-er.  John.  Competition.  MTUet  Structure  and  Regulatory  Institutions  in  Transporta- 
tion. .50  Vn.  L.  Rev.  212,  214  (1964). 

2Thi(1.  at  218. 

'Meyer,  John:  Peck,  Merton  ;  Stenason,  John;  Zwlck,  Chnrles.  The  Kf'onom'cs  of  Com- 
petition in  the  Transportation  Industries,  Harvard  University  Press,  1960,  p.  11. 


117 

With  the  exception  of  the  fourth  objective,  the  others  are  generally  considered 
to  be  the  normal  results  of  the  workings  of  a  competitive  marliet. 

Further,  there  are  certain  unique  elements  of  air  transportation  which,  if  left 
to  the  free  market  processes,  could  create  a  concentrated  industry  in  a  relatively 
short  period  of  time.*  These  characteristics  include  the  complexity  of  aircraft 
operations,  the  increasing  expense  of  individual  aircraft,  the  need  for  extensive 
maintenance  facilities,  and  the  fact  that  a  high  percentage  of  the  passenger 
markets  are  between  points  of  such  low  traffic  density  that  even  a  single  monopoly 
carrier  might  not  be  able  to  cover  costs.  Moreover,  though,  the  air  transportation 
system  still  must  purchase  its  own  goods  and  services  from  the  environment  of 
competition,  for  it  buys  its  supplies  at  prices  set  by  the  economy  as  a  whole,  it 
compensates  its  employees  at  wage  levels  uncontrolled  by  government,  and  it  must 
compete  for  both  the  consumer  dollar  and  the  capital  dollar  in  the  basically  un- 
regulated markets.^ 

All  of  the  above  shows  that  there  are  characteristics  of  the  air  transportation 
market  that  preclude  its  operating  in  perfect  of  workable  competition,  and  that 
the  middle  ground  between  a  natural  monopoly  and  deregulation  is  desirable 
from  the  standpoint  of  public  service  and  from  the  standpoint  of  economic  gains 
in  the  economy  as  a  whole. 

Air  transportation  is  perceived  as  performing  an  essential  public  service, 
namely,  the  movement  of  people  and  goods  throughout  the  nation,  lubricating 
the  flow  of  commerce.  It  is  this  fundamental  purpose,  superimposed  on  the 
natural  and  proper  competitive  environments,  which  government  seeks  to  achieve 
through  its  power  of  regulation. 

The  air  transportation  marketplace,  and  the  nature  of  the  business  itself, 
provide  a  special  role  in  the  economy.  Airline  customers,  including  government, 
business,  and  communities  relying  on  airline  services,  have  a  need  for  such  serv- 
ices at  times,  to  places,  and  under  circumstances  ordinary  business  would  not 
provide.  This  need  is  repeatedly  emphasized  in  the  demand  for  such  services 
expressed  by  the  public  at  route  hearings  before  the  CAB,  in  legislation  enacted 
by  Congress,  and  generally  in  the  marketplace. 

The  National  Air  Transportation  System 

Thus,  the  result  of  this  government  involvement,  combined  with  the  benefits 
of  a  vital  private  enterprise,  has  been  an  environment  of  regulated  competition. 
This  environment  has  provided  a  major  impetus  for  the  development  of  the 
present  national  air  transportation  system  sought  by  Congress  in  the  public 
interest  since  the  enactment  of  the  Civil  Aeronautics  Act  of  1938  in  response  to 
the  unregulated  economic  climate  and  resulting  chaos  characterizing  the  pre- 
ceding decade." 

The  national  air  transportation  system  is  characteri7ed  by  stability,  speed, 
reliability,  and,  above  all,  a  vast  network  of  interlocking  air  routes  connectinj? 
58,000  city-pairs.  Its  value  to  the  nation  and  the  public  is  derived  from  all  of  those 
essential  features — providing  society  with  speed,  mobility,  and  convenience 
through  the  integrated  service  network,  contributing  to  employment,  directly 
and  indirectly  through  allied  services  and  related  industries,  and  making  a 
significant  gross  contribution  to  the  total  output  of  the  United  States. 

It  is  the  continued  strengthening  of  this  system  in  the  public  interest  which 
the  issue  of  regulatory  reform  concerns,  and  which  is  the  stated  goal  of  these 
hearings. 

Objectives  of  Reform  :  Theory  and  the  "Real  World" 

Many  of  the  regulatory  policies  and  procedures  developed  over  the  years  by 
Congress  and  the  Civil  Aeronautics  Board  naturally  have  been  the  subject  of 
discussion  and  debate  among  articulate  and  learned  proponents  and  critics — 
in  government,  in  institutions  of  learning,  and  within  the  airline  industry.  Es- 
pecially in  recent  times,  the  debate  has  been  extended  even  to  question  the  con- 
tinued wif'dom  of  the  underlying  principle  of  regulated  competition  itself. 

Mr.  Chairman,  you  have  spoken  of  the  obligation  of  Congress,  in  its  role  as 
legslative  overseer  of  the  regulatory  structure,  to  examine  that  structure  to  as- 
sure that  the  CAB  carries  out  its  responsibility  to  regulate  air  carriers  in  the 
public  interest,  and  to  make  such  changes  as  may  be  required.  This  process  is 


«Ibid.,  p.  228. 

s  Tbid.,  p.  2. 

"  First  Annual  Report  of  the  Civil  Aeronautics  Authority,  1940,  p.  1. 


118 

not  only  useful,   but  patently  necessary,  we  believe,  to  assure  the  continued 
vitality  of  our  industry  and  the  public  service  it  provides. 

The  Real  World 

We  believe  it  essential  that  in  the  deliberations  today,  and  in  those  vphich 
will  follow,  special  care  be  taken  to  insure  that  it  is  the  "real  world"  of  air 
transportation  which  is  the  subject  of  scrutiny.  Hypothetical  models  alone — 
based  as  they  are,  not  on  the  actual  demonstrated  needs  of  the  traveling  and 
shipping  public,  but  rather  on  theories  applicable  only  in  an  insulated  theoret- 
ical environment — may  be  helpful  as  a  guide  to  thinking.  But  their  application 
beyond  the  classroom  or  the  text  book  must  be  carefully  considered  in  light  of 
existing,  real  circumstances. 

We  intend,  therefore,  to  look  to  this  "real  world",  today's  and  tomorrow's, 
to  review  what  the  objectives  of  air  transiX)rtation  and  the  underlying  regulatory 
principles  are;  to  identify  the  actual  results  of  our  system  of  regulated  com- 
petition ;  and  to  suggest  realistic  areas  of  improvement  in  that  system  to  render 
it  better  able  to  serve  public  needs  in  the  last  quarter  of  this  century. 

The   Critics'   View  and  Its  Inadequacies 

Many  of  those  who  have  found  fault  with  the  regulatory  environment  in  which 
air  transportation  now  operates  seek  to  achieve  a  laudatory  goal :  air  transport 
service  at  minimum  cost-based  prices,  principally  through  operation  at  higher 
load  factors  generally  termed  maximum  efficient  quality  of  service.  We  believe 
we  have  accomplished  that  goal  taking  into  account  another  equally  important 
goal,  the  need  for  adequate  public  service.  Little,  if  any,  attention  is  paid  in  the 
scholarly  works  published  by  the  critics  to  this  important  need  which  you  have 
cited.  Senator  Kennedy,  as  the  basic  objective  of  airline  regulation.  After  all, 
it  is  the  provision  of  adequate  public  service,  at  reasonable  prices,  which  by 
definition  characterizes  an  effective  public  transportation  system.  And  adequacy 
can  be  measured  in  many  ways,  in  respect  to  a  particular  market  for  example, 
by  a  precise  measurement  of  volume,  timing  of  schedules,  ability  to  obtain  seats 
on  a  particular  flight,  load  factor  on  flights  operating  at  convenient  times.'  To 
serve  the  public  adequately,  the  air  transportation  system  must  permit  reason- 
able access  between  all  points  on  the  system. 

Additionally,  the  critics  have  paid  little  attention  to  the  need  for  providing 
an  amply  differentiated  range  of  qualities  and  types  of  any  given  product  to 
choose  from,^  a  prime  objective  of  competition  in  our  nation's  economic  system. 
As  I  shall  demonstrate,  it  is  this  choice  of  product,  at  a  varying  range  of  price, 
which  today  characterizes  air  transportation  in  the  United  States,  and  it  is  a 
measurement  of  the  effectiveness  of  our  competitive  environment  in  serving  the 
public. 

A  system  which  would  fail  these  tests  clearly  would  not  be  providing  effec- 
tive public  service  and,  in  turn,  contributing  to  the  nation's  economic  strength. 

In  reviewing  the  results  to  date  of  regulated  competition  in  public  air  trans- 
portation, we  shall  focus  on  those  objectives  sought  by  critics,  always  mindful 
of  the  overriding  public  requirement  for  adequate  service. 

Achievements  of  Regulated  Competition  Since  1938 

The  True  Costs  of  Air  Transportation 

Since  1938,  average  scheduled  airline  passenger  fares,  in  constant  dollars, 
have  steadily  declined  relative  to  costs  of  all  U.S.  goods  and  services  (exhibit  1). 
The  fact  can  be  further  demonstrated  by  the  following  example :  When  compared 
to  prices  of  certain  other  commonly  purchased  items  in  the  years  1948  and  1974, 
air  fares  represent  a  bargain  to  the  consumer.  During  this  time  the  round  trip 
air  fare  between  New  York  and  San  Francisco  rose  21  percent ;  a  pound  of  round 
steak  increased  in  price  100  percent ;  a  pair  of  men's  shoes  increased  over  120  per- 
cent;  a  Chevrolet  automobile  increased  over  220  percent;  and  though  not 
commonly  purchased,  a  year's  tuition  at  Harvard  increased  over  640  percent 
(exhibit  2). 

Further,  in  comparison  with  other  modes  of  common  carrier  transportation,  air 
fares,  in  1938  constant  dollars,  have  dropped  markedly  more  than  either  bus  or 
coach  rail  fares  ( exhibit  3 ) . 


T  Milwaukee-Chicago-New  York  Restriction  Case.   11  CAB  reports,  310.  319   (1950). 
s  Clark,  .T.  M.,  Comnetition  :  Dynamic  Criteria  of  Appraisal,  Business  Organization  and 
Public  Policy,  Leven,  H.  O.,  ed.,  1958,  p.  8. 


119 

coff?o?nifn  ^""^^^  have  Similarly  experienced  a  continued  decline  relative  to 
costs  of  all  U.S.  goods  and  services  in  the  period  1946-1974  (exhibit  4)  ^^ 

Choice  of  Fares 

For  the  domestic  air  traveler,  a  wide  choice  of  fares  is  currentlv  available 
depending  on  time  of  day  or  week  traveled,  length  of  stay,  and  c?ass  of  service 
desired^xXotable  among  these  fares  is  the  recentlj  approved  broad  based  discount 
fare,  which  provides  an  attractive  bridge  between  charter  and  regular  fares 

Public  use  of  the  entire  range  of  available  fares  historically  has  been  extensive 
For  the  year  ending  September  1974,  for  example,  use  of  lower  than  full  fares 
accounted  for  almost  one-third  of  all  coach  revenue  passenger  miles  (exhibit  5). 
Price  Performance 

From  the  evidence  presented  here,  it  is  inaccurate  and  unfair  to  draw  the  con- 
clusion that  air  fares  are  high.  Further,  to  then  blame  it  on  a  lack  of  government 
regulation  or  the  nature  of  regulated  competition  is,  of  course,  also  inaccurate 
and  unfair.  Let  me  summarize  what  I  have  just  presented  regarding  air  fares : 

1.  The  record  of  regulated  competition  in  the  air  transport  industry  shows 
that,  in  constant  dollars,  air  fares  are  64  percent  less  than  they  were  in 
1938. 

2.  In  the  spectrum  of  price  changes  in  current  dollars,  since  1948  prices  of 
nearly  all  U.S.  goods  and  services  exceed  the  change  in  the  price  of  air  fares. 
Air  fares  have  averaged  less  than  1  percent  a  year  increase  over  this  time 
period. 

3.  The  use  of  scheduled  air  fares  includes  individuals  with  incomes  well 
below  the  average  in  the  U.S.  A  1974  Gallup  survey  showed  that  one  of  every 
seven  adults  making  less  than  $7,000  annual  income  flew  on  the  scheduled 
airlines.  Overall,  the  Gallup  data  revealed  that  18  percent  of  all  adults  mak- 
ing one  or  more  trips  by  air  made  less  than  $7,000  yearly  (exhibit  6). 

4.  Although  the  airlines  are  more  fuel  intensive  than  most  U.S.  industries 
and  have  had  to  absorb  $1  billion  of  additional  fuel  costs  in  the  past  year,  still 
general  air  fare  increases  in  1974  were  less  than  the  change  in  the  consumer 
price  index  and  considerably  less  than  the  change  in  the  wholesale  price 
index.  The  addition  of  the  5  percent  general  fare  increase  in  late  1973  would 
not  alter  this  comparison  appreciably. 

This  pricing  performance,  at  an  adequate  level  of  service,  either  in  the  long 
run  or  the  short  run,  could  not  have  been  matched  by  pricing  in  a  deregulated 
environment.  In  fact,  in  the  long  run,  as  evidenced  by  the  pricing  performance  of 
the  U.S.  economy  as  a  whole,  deregulation  of  the  air  transport  industry  would 
have  placed  prices  and  fares  at  a  much  higher  level  than  now  exists. 

CAB   Performance  Standards— The  Effect  of  the  DPFI 

Members  of  Congress  were  primarily  responsible  for  the  Civil  Aeronautics 
Board  initiating  the  Domestic  Passenger  Fare  Investigation  in  January  1970.  As 
a  consequence,  the  CAB  conducted  a  most  thorough  and  comprehensive  review 
and  revision  of  the  procedures  by  which  domestic  passenger  fares  are  regulated. 
That  part  of  the  investigation  covering  fare  level  and  rate  of  return  procedures 
began  in  January  1970,  and  the  results  were  first  applied  in  May  1973.  It  in- 
volved thousands  of  hours  of  staff  work,  research,  and  open  public  hearings 
participated  in  by  any  who  so  desired.  Administrative  law  judges  listened  to 
the  arguments  of  interested  parties  for  assuring,  among  other  things,  that  the 
airline  industry  was  responsive  to  consumer  interests  and  needs,  and  that  such 
benefits  to  the  traveling  public  in  the  form  of  reasonable  air  fares  were  passed 
on.  The  results  produced  an  innovative  step  forward  in  regulatory  procedures, 
and  were  a  testimonial  to  the  air  transport  industry's  staying  well  ahead  of  any 
need  for  wholesale  regulatory  reform.  The  CAB  standards  of  efficiency  assure 
that  there  is  no  automatic  fare  increase  to  consumers  for  so-called  industry  cost 
mistakes  of  purchasing  excess  equipment,  of  misestimating  a  market  and  hauling 
too  few  people,  or  for  giving  away  business  through  discounting.  The  CAB 
standards  of  efficiency  adjust  for  all  of  these,  and  no  fare  increase  is  allowed 
until  these  adjustments  have  been  made. 

Since  May  1973  each  fare  increase  granted  to  the  industry,  including  the  4 
percent  increase  granted  last  November,  has  been  based  on  meeting  these 
standards. 

Many  of  the  participants  in  various  phases  of  the  investigation  include  those 
who  now  criticize  the  CAB  for  approving  fare  changes. 

These  CAB  fare  level  procedures,  resulting  from  open  public  hearings,  are  not 
arbitrary,  were  not  developed  from  clandestine  meetings,  and  have  a  clear  and 


120 

comprehensive  public  interest  platform  built  in.  Yet  the  opposite  and  misleading 

impression  is  often  given  by  critics  as  an  emotional  appeal  to  consumers.  As  we 

have  shown,  in  fact  it  is  the  consumer  who  is  the  primary  beneficiary  of  these 

procedures. 

Adequacy  of  Service — Load  Factors 

As  I  have  emphasized  previously,  in  addition  to  meeting  the  need  to  provide 
reasonable  prices,  the  primary  function  of  our  industry  is  to  provide  adequate 
and  reliable  service  throughout  the  nation,  to  permit  people  and  goods  to  move 
rapidly  and  smoothly  from  any  one  community  to  any  other.  This  system,  then, 
must  provide  service  at  the  times  and  places  desired  by  the  public. 

Senator  Kennedy,  in  your  statement  on  the  Senate  floor  on  December  16, 
you  referred  to  the  difficulty  a  student  in  Boston  might  experience  in  returning 
to  his  home  in  Detroit  because  of  a  lack  of  available  seats  on  that  route,  I  am 
sure  you  will  recall  that  the  system  load  factor  standard  established  by  the 
Board  in  the  Domestic  Passenger  Fare  Investigation  was  55  percent.  But  the 
diflSculty  of  relating  any  particular  load  factor  to  adequacy  of  service  is  clearly 
illustrated  bv  vour  example. 

In  1974,  the  average  load  factors  experienced  by  the  single  carrier  with  nonstop 
operating  authority  in  the  Boston-Detroit  market  was  59  percent.  Thus,  though 
some  critics  of  our  industry  believe  our  sy.stem  load  factors  should  average  as 
high  as  65  percent,  you  have  cited  an  example  of  possible  inadequate  service  at 
a  load  factor  of  59  percent.  In  reality,  you  have  underscored  a  point  seldom  under- 
stood by  our  load  factor  critics.  To  average  59  percent,  the  Boston-Detroit 
market  shows  a  monthly  load  factor  range  from  52  to  67  ijercent,  this  example 
offering  further  demonstration  of  the  seasonality  of  our  markets  (exhibit  7). 
In  order  to  reach  the  higher  .system  average  load  factor  standards  suggested  by 
many,  the  airlines  would  be  required  to  adjust  capacity  to  conform  to  low- 
demand  periods,  inevitably  resulting  in  less  service  available  to  passengers  in 
busier  times. 

The  question  of  capacity,  then,  is  not  a  simple  one  in  the  real  world  we  serve. 
There  is  a  common  tendency  among  observers  of  the  scheduled  air  transport 
industry  to  overlook  the  fact  that,  although  30  percent  of  our  domestic  traffic 
is  produced  by  only  70  larger  city-pair  markets,  40  percent  is  derived  from  840 
markets,  and  another  30  percent  is  produced  in  some  57,000  smaller  markets 
(exhibit  8).  The  units  of  capacity  available  to  serve  the.se  disparate  markets 
are  not  infinitely  adjustable — they  are  not,  in  fact,  those  elusive  available  seat- 
miles  we  hear  and  read  about ;  they  are  airplanes,  each  containing  many  seats. 

Thus,  to  add  a  few  extra  seat  miles  in  a  market,  where  the  individual  aircraft 
have  maximum  seating  density,  requires  the  addition  of  significant  numbers  of 
seats,  represented  by  another  flight,  or  the  substitution  of  larger  aircraft.  It 
should  be  noted  that  increasing  the  size  of  aircraft  does  not  increase  frequency 
for  the  convenience  of  passengers  in  a  smaller  market.  Similarly,  the  reduction 
of  a  few  seat  miles  to  adjust  to  a  temporary  down-turn  in  traflEic  in  a  particular 
market  or  to  changing  economic  conditions  normally  requires  the  elimination 
of  a  flight.  For  example,  one  major  carrier  operates  a  single  nonstop  Boeing  707 
between  New  York  and  Phoenix,  producing  on  that  one  route  197  million  seat- 
miles  annually.  How  can  a  few  seats  be  added  or  reduced  on  that  route? 

Whether  or  not  the  real  world  facts  conform  with  any  theoretical  model, 
simply  stated,  the  decisional  units  our  industry  planners  work  with  are  not 
easily  flne-tuned.  They  cannot  be  easily  adjusted  without  the  danger  of  substan- 
tial elimination  of  needed  public  service,  and  without  potential  damage  to  the  in- 
tegrated air  transportation  network.  And  the  macro-analysis  frequently  applied 
to  our  industry  does  not  take  into  consideration  the  units  of  capacity  we  must 
deal  with  every  day. 

The  Integrated  Network — Through  Flights  and  Connections 

In  light  of  these  facts,  how  does  the  scheduled  air  transport  industry  provide 
service  for  more  than  57,000  smaller  markets,  and  integrate  those  markets  into 
the  network  including  the  70  major  markets? 

This  achievement  is  the  result  of  two  essential  devices — through  flights  and 
connections. 

Through  flights  constitute  extensions  of  flights  to  provide  service  for  a  smaller 
amount  of  local  traffic  to  extended  points  and  major  markets.  Similarly,  through 
the  connections  offered  by  the  integrated  scheduled  air  transportation  system,  it 
is  possible  to  make  transfers  onto  other  aircraft  in  order  to  reach  any  of  the 
540  aitiiorts  served.  Because  the  number  of  passengers  in  many  of  these  local 


121 

markets  is  far  below  the  level  required  to  supiport  single-plane  service,'  it  is  by 
the  use  of  through  flights  and  connections  that  carriers  are  able  to  provide  the 
present  significant  level  of  single  plane  service  and  transfer  service. 

Coineidentally,  then,  this  process  becomes  the  principal  basis  for  the  airlines' 
ability  to  serve  an  extended  network  of  cities.  Of  course,  it  also  results  in  lower 
industry  load  factors  which  are  brought  down  by  both  through  and  connecting 
flights  from  low  density  cities. 

The  Operation  of  the  Network 

In  a  clear  example  of  this  process,  one  of  the  major  scheduled  airlines  provides 
daily  DC-8  one-stop  through  service  from  Fresno,  California,  via  Denver  to 
Chicago.  At  Denver,  this  flight  is  connected  by  11  other  flights,  from  such  dis- 
parate originations  as:  Pueblo,  Colorado;  Cheyenne,  Wyoming;  Great  Falls, 
Montana  ;  Sacramento  and  San  Jose,  California.  Figure  1  depicts  this  complex 
for  an  average  of  a  peak  and  low  traffic  month.  On  this  eastbound  flight.  27 
passengers  originating  at  Fresno  ultimately  terminate  at  Chicago.  In  addition, 
approximately  42  passengers  board  the  flight  in  Denver  from  11  connecting  flights! 
Out  of  a  total  passenger  load  of  85  from  Denver  to  Chicago,  therefore,  over  three- 
fourths  do  not  originate  in  Denver.  The  majority  of  passengers  on  that  flight  are 
fed  to  it  through  the  highly  integrated  scheduled  system,  a  fabric  woven  over  37 
years  of  regulatory  supervision  of  air  transportation. 

■  "  «^*'x.P°'?,®f $l^i^°"J^  System— Analysis  and  Policy  Recommendations,  Bureau  of  Operat- 
ing Rights,  CAB,  October,  1974,  p.  79. 


122 


Figure   1 


On  the  return  flight,  originating  in  Pittsburgh,  operating  through  Chicago  and 
Denver,  and  terminating  in  Fresno,  the  intricate  fabric  of  through  flights  and 
connections  is  even  more  apparent,  as  shown  on  figure  2 


123 


Figure  2 


Unrestricted  entry  or  exit  would  cause  serious  consequences  to  this  system. 
There  can  be  little  doubt  that  if  one,  two,  three,  or  more  of  these  feeder  con- 
nections, or  the  beyond  segments  on  through  fliglits,  were  eliminated  from  this 
c(mii)lex  the  fabric  itself  would  disintegrate. 

As  is  clear  in  the  cited  examples,  the  profitability  of  the  primary  market,  in 
this  case  Denver-Chicago,  is  dependent  on  the  many  smaller  secondary  markets 
it  serves.  If  oven  a  few  of  the  secondary  markets  ceased  being  served  regularly 
and  dependably,  the  primary  market  may  well  become  less  profitable.  As  a  re.sult, 
it  would  receive  less  service,  and  the  remaining  smaller  feeder  markets  would 
also  receive  less  indirect  service.  The  ultimate  effect,  then,  of  small  market 
adjustments  can  be  extreme. 


124 

Further  dramatic  examples  of  this  principle  are  readily  available,  e.g.,  Albu- 
querque, New  Mexico;  Moline,  Illinois;  Nashville,  Tennessee;  Portland,  Oregon; 
Providence,  Rhode  Island ;  Tiicson,  Arizona,  are  readily  accessible  to  Akron/ 
Canton,  Ohio,  with  a  single  connection  and  never  more  than  a  single  stop. 

Furthermore,  in  1972  this  system  provided  single  plane  service  to  all  markets 
with  over  70  passengers  a  day,  and  to  all  but  three  markets  carrying  more  than 
60  passengers  daily^ — a  direct  result  of  the  combination  effect  of  through  traffic 
between  several  markets  on  a  single  linear  route.^"  Additionally,  in  1972  on  flights 
between  cities  less  than  100  miles  apart,  90  percent  of  all  passengers  transported 
connected  to  other  flights  or  were  carried  as  through  passengers ;  on  flights 
between  cities  600-800  miles  apart,  such  connecting  or  through  passengers  com- 
prised about  two-thirds  of  the  total  ^^  (exhibit  9). 

The  Interdependence  of  the  Network 

The  quality  of  service  to  the  57,000  smaller  relatively  low-demand  markets, 
therefore,  is  directly  dependent  on  the  highly  integrated,  stable  air  transport 
system.  The  system  operates  witliout  significant  changes  in  the  number  of  car- 
riers offering  service,  without  the  instability  which  would  characterize  unre- 
stricted freedom  of  entry  and  exit,  and  with  the  CAB-imposed  requirement  that 
service  continue  to  be  provided  where  warranted  in  the  public  interest.  Lapses  in 
service  resulting  from  carrier  failures,  from  large  scale  withdrawals  of  service, 
or  from  lack  of  a  tie-in  to  ticketing,  baggage  handling,  or  other  benefits  of  the 
present  system,  would  inevitably  disrupt  that  system,  and  would  inevitably  work 
hardship  first  on  those  living  in  smaller  communities  who  rely  on  quality 
scheduled  air  service  to  meet  their  transport  needs.  Moreover,  automobile  gaso- 
line consumption  would  increase  as  people  are  unable  to  use  air  transportation 
and  are  forced  into  the  use  of  ground  transportation.  Further,  it  would  represent 
a  major  cost  to  the  nation  in  time  lost  in  conducting  business  or  time  shortened 
for  personal  or  pleasure  reasons. 

In  January,  1973,  Dr.  Cary  Fromm  of  Data  Resources,  Inc.,  completed  a  study 
for  ATA  on  The  Value  of  Aviation  Activity.  The  study  estimated  cost  and  time 
differentials  in  1970  among  four  modes  of  service  over  the  average  airline  flight 
distance  of  679  miles.  Cost  and  time  estimates  covered  the  entire  trip,  including 
not  only  enroute  but  terminal  and  local  access  costs  and  time  as  well. 

The  DRI  study  also  estimated  the  average  family  income  of  an  air  traveler  in 
1970  to  be  $22,500  a  year.  If  such  a  traveler  valued  his  time  at  an  hourly  rate 
equivalent  to  his  annual  salary  ($10.47  per  hour),  the  following  table  would 
illustrate  the  monetary  value  of  traveling  by  air  versus  alternative  modes :  ^ 


Added  trip  cost 

of  air  versus 

alternative  mode 

Time  saved  in 

traveling  by  air 

(minutes) 

Monetary  sav- 
ings in  traveling 
by  air 

Air/rail.. 

Air/bus 

Air/auto... 

.--- 17 

441 
563 
508 

'1! 

72 

Birmingham,  Alabama,  to  Miami,  Florida,  is  about  the  same  trip  distance 
(661  miles)  as  the  average  distance  used  in  the  DRI  study.  In  1970  there  were 
an  estimated  29,000  passengers  in  this  market  who  started  their  air  trip  in  one 
of  these  cities  and  whose  final  destination  was  the  other  city.^"  The  dollar  value 
of  the  time  savings  in  this  market  alone  would  be  : 

Time  savings 
(in  millions) 

Air/rail      1.9 

Air/bus 2.4 

Air/auto  2.1 


i«Ibld.,  p.  62. 

11  Ibid.,  p.  65. 

^  Fromm,  Gary,  and  Data  Resources,  Inc,  Value  of  Aviation  Activity,  ATA,  January, 
1973.  pp.  9  and  12. 

"  CAB,  Origin-Destination  Survey  of  Airline  Passenger  Traffic,  Domestic,  table  8,  4th 
quarter  1970,  p.  86. 


125 

On  this  basis  elimination  of  air  service  to  thousands  of  smaller  city-pair 
markets  would  cost  the  national  economy  billions  of  dollars.  Substitution  of  less 
time-efficient  aircraft  would  also  cost  the  air  traveler  and  the  national  economy. 
Commuter  aircraft,  for  example,  cannot  fly  as  fast  as  larger  propellor  or  jet  air- 
craft nor  as  far.  Again,  application  of  this  time  loss  impact  to  thousands  of  city 
pairs  would  cost  the  economy  billions  of  dollars. 

Efficient  and  Productive  Operations 

Within  the  framework  of  regulated  competition,  the  scheduled  airlines  have 
produced,  through  operational  efficiency  and  productivity,  the  quality  public 
service  I  have  described. 

The  scheduled  airlines  have  operated  with  a  high  level  of  schedule  reliability. 
In  1974,  98  percent  of  all  miles  scheduled  were  actually  flown,  a  record  especially 
remarkable  in  view  of  the  variety  of  weather  conditions  experienced  and  the 
degree  of  mechanical  stress  placed  on  a  system  involving  13,000  daily  flight  opera- 
tions. A  non-integrated  system,  lacking  regulatory  controls,  could  not  be  expected 
to  approach  this  degree  of  reliability. 

Equally  remarkable,  the  scheduled  airlines  have  conducted  their  operations  in  a 
time  of  high  inflation  with  a  high  degree  of  cost  control — especially  over  those 
costs  which  were  peculiarly  within  the  power  of  airline  management  to  control. 
For  example,  advertising  costs  per  revenue  ton-mile  in  the  third  quarter  of  1974 
were  8  percent  less  than  in  1967,  and  passenger  food  costs  per  passenger  mile  rose 
less  than  5  percent  over  the  past  year.  On  the  other  hand,  since  1967  labor  cost 
per  employee  has  risen  about  92  percent  and  fuel  cost  per  gallon  by  150  percent 
(exhibit  10).  Nevertheless,  in  1974  the  scheduled  airlines  carried  20  percent  more 
passengers  than  in  1969,  accounting  for  30  percent  more  revenue  passenger  miles, 
hut  with  3.5  percent  fewer  employees. 

Clearly,  then,  the  management  record  of  the  scheduled  airlines  is  a  good  one, 
especially  under  conditions  of  great  stress,  and  the  payoff  for  the  public  has  been 
in  low  fare  levels  as  measured  in  comparison  with  other  goods  and  services  pro- 
vided in  the  economy  at  large. 

Finally,  it  is  important  to  note  that  the  speed  and  safety  record  of  the  industry, 
resulting  from  technological  improvements  which  the  airlines  helped  develop, 
has  permitted  the  public  to  travel  quickly  and  safely  across  the  nation.  The 
impact  of  these  developments  on  the  abilities  of  government  and  private  business- 
men to  conduct  their  important  affairs,  and  the  general  public  to  travel  on  per- 
sonal vacation  or  pleasure,  must  be  weighed  in  any  assessment  of  the  effectiveness 
of  regulated  competition. 

Impact  of  Regulatory   Reform 

Public  Policy,  Section  102 

The  scheduled  airlines  lielieve  that  this  review  of  the  regulatory  structure  and 
environment  in  which  air  transportation  operates  can  product  improvements  to 
the  excellent  system  that  exists.  We  shall  suggest,  today  and  in  later  stages  of 
your  deliberations,  some  areas  where  we  believe  adjustments  might  be  considered. 

Nevertheless,  while  any  of  our  carriers  may  be  critical  of  some  aspects  of  the 
specific  application  by  the  CAB  of  its  statutory  authority  pursuant  to  the  Federal 
Aviation  Act  of  1958,  we  believe  that  underlying  public  policy  contained  in  section 
102  of  that  Act  is  sound.  It  is  vital  to  our  nation's  long-term  interest  that  the 
precepts  established  in  section  102  be  reiiiforced,  not  discarded.  For,  as  the  real 
world  results  we  have  described  so  clearly  demonstrate,  those  principles  have 
worked  well  to  serve  the  broadest  public  interest.  In  fact,  if  section  102  did  not 
exist,  it  would  most  certainly  be  needed  now. 

Theory  Versus  Practice — The  Public  Interest 

No  one  can  be  certain  of  the  consequences  of  tampering  with  the  structure — 
least  of  all  those  who  base  their  proposals  on  so-called  "perfect"  econometric  or 
theoretical  models.  Such  models  are  perforce  based  on  assumptions  untested  in 
the  special  marketplace  and  operating  environment  which  controls  air  transpor- 
tation " — and  they  are  developed  fundamentally  wnthout  a  basic  regard  to  all  of 
the  public  interest  considerations  which  must  concern  Congress,  the  CAB,  the 


'*  Assumptions  on  these  models  generally  begin  with  ceterus  paribus,  i.e..  all  other 
things  remaining  equal.  In  the  real  world  all  other  things  do  not  remain  equal  and  the 
change  in  one  factor  must  be  reviewed  in  light  of  changes  in  all  other  factors. 


126 

airlines,  and  the  tliousands  of  U.S.  communities  served  by  scheduled  air  trans- 
portation. 

These  considerations,  broadly  termed  public  service,  are  not  susceptible  to  neat 
econometric  equations  and  tidy  quantification,  but  they  are  nonetheless  real,  and 
frequently  are  determinative  if  a  viable  national  air  transportation  network  is  to 
continue  and  contribute  to  the  national  economic  welfare,  operating  as  it  must 
within  the  matrix  of  conflicting  interests. 

Moreover,  in  meeting  the  critics  on  their  own  ground,  a  word  must  be  said 
with  respect  to  the  consequences  one  might  anticipate  from  wholesale,  so-called 
"free  market"  restructuring  of  the  system. 

Disintegration  of  the  Network 

The  present  system  represents  a  wholly  integrated  network  of  scheduling,  con- 
nections, interlining,  and  routing  among  and  between  carriers  serving  cities  of 
varying  size  and  geographic  proximity  to  each  other.  Despite  this  high  degree 
of  integration,  the  system  is  dynamic — it  is  continually  changing  to  meet  new 
traffic  needs.  A  glance  at  the  Official  Airline  Gride  (which  contains  the  schedules 
for  the  entire  air  transport  network)  provides  dramatic  evidence  of  this  point. 
For  example,  the  OAG  (North  American  edition)  published  on  February  1,  1975, 
is  898  pages  long.  This  massive  volume  depicts  the  schedules  of  every  scheduled 
carrier  in  North  America,  to  and  from  virtually  every  community  served,  with 
connections  indicated.  The  OAG  is  republished  every  two  weeks,  and  incorporates 
the  most  up-to-date  changes  in  schedules,  connections,  and  service  provided 
throughout  the  system,  throughout  the  58,000  U.S.  markets  (and  some  foreign 
markets)  served  by  the  scheduled  airlines. 

It  is  the  continuity  and  complete  integration  of  this  network  which  wOuld  be 
jeopardized  by  drastically  revising  or  dismantling  the  structure  so  carefully 
constructed,  and  continually  improved,  over  the  last  37  years.  And  with  what 
result? 

First,  there  can  be  little  doubt,  at  least  in  the  short  term,  that,  adaptable 
though  they  may  be,  scheduling,  connections,  interline  routings,  ticketing  and 
baggage  handling  would  be  severely  disrupted  by  airline  entry  into  and  exit 
from  markets  on  an  unrestricted  basis.  Customer  service  inevitably  would  be 
most  adversely  affected. 

Even  more  important,  as  some  have  properly  contended,  free  market  forces 
would  result  in  scheduled  airlines'  leaving  many  less  profitable  markets,  and 
concentrating  only  on  certain  of  the  major  routes,  with  the  consequence  that 
medium  and  smaller  size  cities  of  the  Northeast,  Midwest,  South,  and  Far 
West  would  suffer. 

How  would  they  suffer?  First,  their  access  to  major  markets  would  be  re- 
stricted severely.  Certainly  many  entrepreneurs  would  seek  to  serve  some  of  those 
markets.  Such  service  would  be  represented  by  airlines  of  varying  reliability, 
new  and  old,  some  of  erratic  or  marginal  financial  strength,  often  suffering  at  the 
outset  by  the  extraordinary  start-up  costs  required  for  purchase  of  aircraft  and 
establishment  at  airport  facilities. 

The  record  of  the  commuter  carrier  industry,  good  as  it  is  with  respect  to 
reinforcing  the  existing  scheduled  air  transportation  network,  offers  ample  proof 
of  the  foreseeable  circumstances  confronting  many  smaller  operators  seeking  to 
serve  the  many  less  dense  markets  now  served  well  through  the  effects  of  through 
and  connecting  scheduled  air  transportation.  While  much  has  been  said  and 
written  of  the  diseconomies  of  scale  in  air  transportation,  the  diseconomies  of 
small  scale  with  respect  to  stability,  dependability,  and  overall  adequacy  of 
service  are  particularly  hazardous  and  should  be  carefully  examined. 

For  example,  in  1972,  431  U.S.  cities  received  scheduled  pas.senger  commuter 
service.  Of  those  cities  seventy-four  (17  percent)  were  abandoned  in  1973,  and 
service  was  added  to  104  new,  previously  unserved  cities.  Thus,  in  a  single  year, 
178  cities  exi)erienced  a  change  in  scheduled  computer  service — roughly  one-third 
of  all  cities  receiving  such  service.  The  volatile  experience  of  the  largely  unregu- 
lated commuter  system  hardly  gives  one  confidence  that  the  consequences  of  a 
free  market  approach  to  air  transportation  would  represent  an  adequate  substitute 
for  the  benefits  of  the  stability  which  has  characterized  the  national  system 
wisely  devised  by  Congress  and  regulated  by  the  CAB  since  1938  Reliable  service 
to  small  and  medium  cities  especially  is  threatened  by  any  weakening  of  the 
integrated  stucture,  and  a  weakening  of  those  markets  threatens  the  continued 
strength  even  of  many  of  the  larger  markets. 


127 

Further,  the  cost  to  the  smaller  communities  of  operating  their  existing  airport 
facilities  in  the  absence  of  regular  scheduled  service  would  be  high.  Maintaining 
a  reasonably  up-to-date  facilty  for  uncertain  or  sporadic  service  ay  well  prove 
beyond  the  means  of  many  communities.  If  those  communities  were  to  require 
the  carrier  serving  the  community  to  bear  a  high  proi)ortion  of  these  expenses  on 
the  basis  of  irregular  operations,  the  cost  to  that  carrier  may  well  be  prohibitive 
even  for  the  level  of  service  it  is  otherwise  capable  of  jiroviding.  Thus,  the  dis- 
integration of  the  system  may  well  feed  on  itself — resulting  in  even  less  service 
to  many  U.S.  communities  not  closely  proximate  to  the  major  markets. 

The  Public  Cost  of  65%  Load  Factor 

The  relationship  between  load  factors  and  service  requirements  for  the  many 
communities  receiving  scheduled  air  service  is  profound.  Many  critics  of  the  air- 
line industry  have  criticized  the  load  factor  performance.  Yet,  the  55  percent 
load  factor  standard  established  by  the  Civil  Aeronautics  Board,  taking  into 
account  load  factors  of  30-40  percent  on  some  low  density  routes  and  peaks  of 
80-95  percent  on  some  high  density  routes,  incorporates  an  allowance  for  a  level 
of  service  suitable  for  maintaining  the  expansive  network  of  hundreds  of  smaller 
communities  throughout  the  United  States.  In  order  for  these  commimities  to  be 
served,  average  system- wide  load  factors  cannot  be  high. 

This  result  is  graphically  exemplified  by  the  impact  on  air  transportation  of  the 
current  energy  crisis.  We  have  developed  estimates  of  possible  future  reductions 
in  service  as  measures  of  the  impact  of  the  Administration's  energy  proposals. 
In  order  to  meet  a  65  percent  domestic  system  load  factor  at  prevailing  fare 
levels,  as  suggested  by  some  as  a  solution  to  the  airlines  growing  fuel  cost 
problem,  availal)le  seat  miles  (system  capacity)  would  have  to  be  reduced  25 
percent,  and  hundreds  of  aircraft  grounded,  with  tens  of  thousands  of  employees 
released.  The  effect  of  cutbacks  of  this  magnitude  on  service  to  cities  large  and 
small  would  be  a  severe  penalty  to  public  service  and  to  the  economy  as  a  whole. 

Recommended  Regulatory  Reform  Considerattons 

In  general,  the  airline  industry  believes  that  the  regulatory  environment 
within  which  we  operate  has  served  the  public  interest  well.  We  believe  the 
results  support  that  conclusion. 

However,  in  certain  instances,  airlines  have  opposed  and  continue  to  oppose  the 
manner  in  which  the  regulatory  process  has  been  carried  out.  And  we  believe  that 
certain  areas  of  economic  regulation  of  our  industry  do  require  attention. 
Regulatory  Lag 

By  no  means  restricted  to  the  procedures  adopted  by  the  Civil  Aeronautics 
Board,  the  problem  of  regulatory  lag  (delay  in  regulatory  decisionmaking)  is 
endemic  to  the  regulatory  process  throughout  much  of  government.  As  a  conse- 
(luence,  decisions  when  made  may  no  longer  be  timely  or  well-suited  to  the  cir- 
cumstances. Notable  among  the  public  benefits  resulting  from  the  DPFI  has  been 
the  reduction  of  time  between  cost  changes  and  fare  adjustments,  particularly 
early  in  1974  with  respect  to  the  impact  of  the  fuel  crisis  on  airline  costs.  It  seems 
sensible  to  our  industry  that  the  application  to  other  areas  of  regulatory  decision- 
making of  more  efficient  and  streamlined  approaches,  with  full  public 
participation  at  all  stages,  would  result  in  a  more  responsive  regulatory  process. 
Reporting  Requirements 

As  with  respect  to  the  question  of  regulatory  lag,  we  strongly  believe  that  the 
proper  requirement  for  full  and  complete  industry  reporting  of  economic  and 
financial  statistical  data  need  not  result  in  duplicative  and  redundant  effort  on 
the  part  of  the  industry  or  the  regulator.  The  application  of  reasonable  cost  and 
benefit  analysis  of  the  current  reporting  requirements  will  result,  in  our  opinion, 
in  a  streamlining  of  this  effort  and  substantial  cost  savings  to  both  industry 
and  government,  without  in  any  way  impairing  the  public  interest  in  full  and 
complete  data.  In  fact,  through  simplification  and  elimination  of  redundancy, 
much  of  the  complex  data  now  available  could  be  rendered  more  understandable, 
and  therefore  more  useful  to  all  interested  parties  to  the  regulatory  process. 
Continued  Refinement  of  Regulatory  Standards 

The  Civil  Aeronautics  Board,  notably  in  the  DPFI,  has  established  standards 
for  measurement  of  industry  performance.  While  our  industry  has  generally 


128 

supported  their  adoption,  there  continue  to  be  differences  of  opinion  with  respect 
to  the  application  of  some  of  those  standards.  We  believe  regulatory  standards 
need  not  be  set  in  concrete.  On  the  contrary,  they  should  be  subject  to  continuing 
scrutiny  by  the  Board,  and  amended  when  and  as  required  in  the  public  interest. 
Such  continuing  refinement  would  characterize  a  regulatory  process  truly  respon- 
sive to  the  continuing  changes  in  the  dynamic  American  economy. 

Route  Development  Policy 

The  scheduled  airlines  believe  the  undertaking  by  the  Civil  Aeronautics  Board 
of  a  comprehensive  review  of  route  development  policy  is  desirable.  There  may 
be  different  opinions  within  our  industry  on  the  findings,  conclusions,  and  rec- 
ommendations contained  in  the  study  undertaken  by  the  CAB's  Bureau  of  Oper- 
ating Rights,  the  Domestic  Route  System :  Analysis  and  Policy  Recommenda- 
tions.^'^ However,  we  believe  careful  consideration  should  be  given  to  the  view 
contained  in  that  report  that : 

.  .  .  regulatory  route  and  route-related  policies  should  be  directed  to  im- 
proving the  efficiency  and  quality  of  the  system,  through  careful  expansion 
of  route  authority  when  required  by  traffic,  and  through  route  rationali- 
zation.^" 
Because  of  our  obligation  to  provide  the  public  adequate  service,  we  share  the 
Bureau's  statement  that  without  such  policies  : 

...  it  is  possible  that  the  quality  and  eflBciency  of  the  system  will  decline 
over  time  and,  ultimately,  adv'ersely  affect  the  general  economy." 
The  Board,  our  industry,  and  the  public  should  carefully  consider  the  Bureau's 
recommendations  with  respect  to  requirements  in  future  route  proceedings  for 
submission  of  data ;  implementation  of  published  standards  for  route  expansion 
consistent  with  the  Board's  DPFI  goals  and  traffic  requirements ;  and  route 
rationalization.  This  approach  could  represent  a  significant  step  in  dealing  with 
an  aspect  of  air  transport  regulation  deserving  attention. 

Tariffs 

Section  403  of  the  Federal  Aviation  Act  of  1958  provides  for  carrier  filing  of 
full  and  complete  tariffs  with  the  CAB  for  public  inspection. 

The  principle  embodied  in  this  statutory  requirement  is  clear — that  the  public 
interest  is  best  served  by  advance  notice  of  applicable  rates  and  services,  rules, 
regulations,  and  practices  for  air  transportation.  Under  current  procedures, 
achievement  of  this  objective  is  impeded  by  last-minute  approval  or  suspension 
of  tariffs  by  the  Board.  The  scheduled  airlines  have  advocated  a  change  in  these 
procedures,  to  extend  the  filing  deadline  from  30  days  prior  to  implementation 
to  45  days,  with  Board  decision  required  after  30  days,  thereby  providing  15 
days  advance  public  notice  of  tariff  changes.  Further,  in  view  of  the  necessary 
complexity  of  tariff  filings,  we  believe  adoption  of  a  simplified  short-form  tariff 
would  work  to  enhance  public  understanding  of  a  given  tariff  cliange.  The  short- 
form,  of  course,  would  not  replace  the  more  complete  tariff  filing  properly  re- 
quired for  complete  information  purposes.  However,  it  would  serve  to  render 
more  meaningful  to  the  consumer  the  effect  of  any  given  tariff  change. 

In  conclusion,  we  wish  to  reemphasize  our  support  for  the  effort  this  Sub- 
committee has  undertaken,  today  and  in  later  sessions,  to  review  the  effective- 
ness of  federal  regulation  of  the  scheduled  airline  industry.  We  believe  the  public 
benefits  derived  from  regulation  have  been  many  ;  and  we  urge  consideration 
of  the  suggestions  for  improvement  which  we  have  made,  and  will  make  in 
coming  hearings.  Out  of  this  process  and  the  continued  attention  of  Congress 
to  the  needs  of  the  public  for  essential  public  air  transportation  services,  we 
are  confident  the  strength  of  the  national  air  transport  system  is  assured. 

On  behalf  of  the  Air  Transport  Association,  I  wish  to  express  our  gratitude 
for  the  opportunity  to  discuss  with  this  Subcommittee  our  views  on  this  matter 
so  vital  to  our  nation's  economic  welfare. 


1"  Bureau  of  Operating  Rights,  CAB,  October.  1974. 
i«  Ibid.,  p.  9. 
I'Ibid.,  p.  146. 


129 

Exhibit  1 


AVERAGE  FARE  PER  PASSENGER  MILE 

DOMESTIC  SCHEDULED  SERVICES  --  TRUNK  AIRLINES 

(1938  Constant  Dollars)!/ 


AVERAGE 

REVENUE 

PER 

PASSENGER 

MILE 

6 


] 

\ 

\ 

v^ 

\ 

„        .  .„  Si 

\_l    Deflated  by  Implicit  Deflator  -  GNP,   Adjusted  to  1938  Base. 
2/     1974  Yield  for  First  Nine  Months. 


51-146   O  -  76  -  pt.  1  -  10 


130 

Exhibit  2 


CHANGES  IN  AIRFARES  COMPARED  WITH 

OTHER  U.S.   PRODUCTS  AND  SERVICES 

(Current  Dollars) 

Per  cent 
change 

Item  1948  1958  1968  1974  1948-1974 

House  $47,409         $59,558  $72,840  $100,000  +110.9% 

Family  Size  Chevrolet  $    1,255         $   2,  OSl  $2,656  $     4,119  +228.2% 

Newspaper 

(The  New  York  Times)  3(p  5<?  10(p  15<p  +     400% 

Ticket  to 

Broadway  Musical  $6.00         $      8.05  $    12.00  $      15.00  +      150% 

Ranch  Mink  Coat  $   4,200         $   4,000  $   4,200  $     4,500  +      7.1% 

Nathan's  Hot  Dog  20(p  25?  35(?  50?  +      150% 

Pair  of  Blue  Jeans  $      3.45         $      3.75  $      5.29  $      11.25  +226.1% 

Gallon  of  Gasoline  25.  9(p  30. 4(;  33.7?  55.6?  +114.8% 

Pair  of  Men's  Shoes  $9.95         $    11.95  $    16.95  $      21.95  +120.6% 

Year's  Tuition  at  Harvard  $        455         $    1,250  $   2,000  $      3,400  +647.3% 

Hospital  Cost 

per  in-patient  day  $    13.09         $   28.17  $   61.38  $    114.90  +777.8% 

Roundtrip  Airfare 

New  York-London  $        630         $453.60  $484.50  $  640  +      1.6% 

Phone  Call,   New  York  to 

Topeka,  Kansas  (day  rate)         $      1.90         $      1.80  $      1.40  $        1.25  -    34.2% 

Pound  of  Round  Steak  90.5?         $      1.04  $      1.14  $        1.81  +100.1% 

Pound  of  Chicken  61.2?  46.5?  39.8?  55.7?  -  9% 

Roundtrip  Airfare 

New  York-San  Francisco  $286.30         $        208  $        290  $   346.30  +   21.0% 


Median  Family  Income 


*  Projected 

Source:    New  York  Times  and  Official  Airline  Guide 


131 

Exhibit  3 


AVERAGE  FARH  PER  PASSENGER  MILE 
INDEX  1938=100 
(Constant  Dollars)-' 


1/    Deflated  by  Implicit  Deflator  -  GNP,   Adjusted  to  1938  Base. 
2/    1974  Data  for  First  Nine  Months. 


132 


Exhibit  4 
AVERAGE  AIR  FREIGHT  RATES  PER  TON  MILE 

DOM'  S lie  OPICRATIONS 
U.  .^^riTT'TJUT.TTi"  AiUi.lNI'S 
(1940  Constant  Dollars)I7 


AVERAGE 
REVENUE 
PER  TON  15 
MILE 


\  I  j  '  ' 


1960 
YEAR 


1/    Deflated  by  Implicit  Deflator  -  GNP,    Adjusted  to  1946  Bas 
2/     1974  Yield  for  First  Nine  Months. 


133 

Exhibit  5 

DISTRIBUTION  OF  TRUNK  AIRLINES  SCHEDULED  COACH  FARES 
YEAR  ENDED  SEPTEMBER  30,    1974 
48  STATE  DATA 


Revenue  Passenger 
Fare  Type  Miles  (OOP,  OOP) 

TOTAL  FULL  FARE 

TOTAL  DISCOUNT 

Youth  Standby 

Youth  Reservation 

Family 

Discover  America 

Military  Standby 

Military  Reservation 

Group 

Child 

Excursion 

Other 
TOTAL  95,820  100.0  6.99 

Source:    Monthly  carriers  submission  to  the  Civil  Aeronautics  Board. 


65 

,  132 

30 

,688 

121 

797 

6, 

,  598 

3, 

,957 

738 

2, 

.555 

1, 

372 

1, 

683 

1, 

18P 

11, 

687 

95, 

820 

Percent  of 
Total 

Yield 
(C  per  RPM) 

68.0 

7.59 

32.0 

5.71 

0.1 

6.12 

0.8 

6.97 

6.9 

6.88 

4.  1 

5.75 

0.8 

3.80 

2.  7 

5.32 

1.4 

5.77 

1.8 

4.76 

1.2 

5.59 

12.2 

5.30 

134 

Exhibit  6 

INCOME  CHARACTERISTICS  OF  ADULTS 
WHO  HAVE  FLOWN  ON  REGULAR  PASSENGER  AIRLINE 


Percent  Within  Each 
Income  Group  Who 
Annual                          Have  Flown  During 
Family  Income  Past  12  Months 


Percent  of  Adults  Making 
One  or  More  Air  Trips 
During  Past  12  Months 
By  Income  Group 


$15,  000  and  over  41 

$10,000  -  $14,  999  22 

$    7,  000  -  $    9,999  16 

Less  than  $7,000  15 


46 


24 


18 


Undesignated 


TOTAL 


100 


Source:    The  Gallup  Organization,   Inc.  ,   The  Incidence  of 
Air  Travel  Among  the  General  Public.    1974 


135 

Exhibit  7 

1974  LOAD  FACTORS 
NON-STOP  SERVICES  --  BOSTON-DETROIT  MARKET 

Load  Factor 

(%) 

January  54 

February  53 

March  58 

April  64 

May  67 

June  67 

July  58 

August  63 

September  59 

October  59 

November  53 

December*  52 

Average  59 

"^    Estimated 

Source:    Company  records  of  carrier. 


136 

Exhibit  8 

DISTRIBUTION  OF  AIRLINE 
PASSENGER  TRAFFIC  BY  NUMBER 
OF  CITY  PAIRS 
(Year  Ended  June,    1974) 

Percent  of  Total  Number  of 

Passenger  Miles  City  Pairs 

10%  7 

20%  30 

30%  70 

40%  145 

50%  272 

60%  494 

70%  908 

1/ 
100%  58,000  (Approx.) 


1/    Includes  markets  partially  served  by  commuter 
airlines  when  a  part  of  a  trip  for  which  a  certifi- 
cated carrier  sells  the  ticket. 

Source:    CAB,   Origin-Destination  Survey  of  Airline 
Passenger  Traffic  -  Domestic^  Second 
Quarter  1974. 


137 

Exhibit  9 

PERCENT  OF  TRANSPORTED  PASSENGERS  WHO  ARE         . 
NOT  THROUGH  OR  CONNECTING,    BY  FLIGHT  DISTANCES-^ 
(For  City  Pairs  with  Non-Stop  Service) 


Mileage 


All  Mileage  43.4 

Less  than  100  miles  9.6 

100  to  199  miles  25.6 

200  to  299  miles  39.0 

300  to  399  miles  44.1 

400  to  499  miles  43.0 

500  to  599  miles  43.8 

600  to  699  miles  51.3 

700  to  799  miles  50.2 

800  to  899  miles  54.1 

900  to  999  miles  60.8 

1,  000  to  1,  499  miles  75.2 

1,  500  to  1,  999  miles  55.8 

2.  000  miles  and  over  92. 1 


1/    Excludes  city  pairs  with  fewer  than  2,  500 

nondirectional  O&D  passengers  (approximately 
6.8  per  day). 

Source:    CAB,   the  Domestic  Route  System;  Analysis 

and  Policy  Recommendations,   October,    1974. 


138 

Exhibit  10 

ATA  AIRLINE  COST  INDEX 
U.S.   TRUNKS  AND  LOCAL  SERVIC^ CARRIERS 
3  Qtr.    1974 


INDEX 
(1967=100) 

LABOR  192.4 

(Employment  Cost 
Per  Employee) 

CAPITAL  153.7 

(Interest  on  Long  Term  Debt) 

FUEL  250.9 

(Cost  Per  Gallon) 

PA  SSE  NGER  FOOD  125.3 

(Cost  Per  Revenue 
Passenger  Mile) 

ADVERTISING  &  PROMOTION  92.  1 

(Cost  Per  Revenue  Ton  Mile) 

LANDING  FEES  229.2 

(Cost  Per  Aircraft  Ton  Landed) 

AIRCRAFT  MAINTENANCE 
MATERIALS  91.8 

(Cost  Per  Available  Ton  Mile) 

TRAFFIC  COMMISSIONS- 
PASSENGER  199.3 
(Cost  Per  Revenue 
Passenger  Mile) 

ALL  OTHER  146.5 

(Implicit  Deflator  -  GNP) 

COMPOSITE  174.5 


Percent 
Change  Over 
3  Qtr.  1973 

7.3 


102.3 


i.5 


(    2.9) 


17. 


10.4 


Percent  of 
Total  Cash 
Operating 
Expensesi.' 

40.7 


3.3 

18.9 

3.6 


2.5 


2.9 


22.2 


100.0 


1/    Total  Operating  Expenses  plus  Interest  on  Long  Term  Debt 
~      Less  Depreciation  and  Amortization. 


139 

ATA    STUDY    ON    DEREGULATION 

[In  a  letter  dated  February  7, 1975  the  chairman  of  the  subcommittee 
made  more  explicit  a  request  of  Dr.  James  for  a  list  of  routes  that  would 
be  eliminated  under  more  competitive  conditions.  On  April  3,  1975 
the  Air  Transport  Association  submitted  to  the  subcommittee  a  reply 
extending  more  than  200  pages.  The  chairman  then  requested  evalua- 
tions of  this  ATA  study  from  the  U.S.  Department  of  Transportation, 
the  Council  of  Economic  Advisers,  the  Council  of  Wage  and  Price 
Stability,  the  General  Accounting  Office,  Prof.  John  W.  Drake,  Purdue 
University,  Prof.  Theodore  E.  Keeler,  University  of  California  at 
Berkeley,  Prof.  Sam  Peltzman,  University  of  Chicago,  Prof.  Roger 
Sherman,  University  of  Virginia,  and  Prof.  Andrew  Whinston, 
Purdue  University.  Their  replies  follow  the  ATA  study  in  that  order, 
p.  379  ff.,  below  except  that  the  replies  of  DOT  and  GAO  are  printed 
at  the  end  of  the  record  of  the  day  of  hearings  of  March  4,  1975,  p. 
2285  ft'.,  below,  because  they  were  received  too  late  for  inclusion  here.] 

U.S.  Senate, 
WasJimffton,  B.C.,  February  7,  1975. 
Mr.  George  W.  James, 
Air  Transport  Association, 
Washington,  B.C. 

Dear  Mr.  James  :  Thank  you  again  for  appearing  before  the  Subcommittee  on 
Administrative  Practice  and  Procedure  last  Thursday.  Your  testimony  and  state- 
ment were  very  lielpful. 

As  I  mentioned  at  the  hearing  I  should  appreciate  receiving  further  detailed 
specific  factual  information  from  you  concerning  the  following  questions  : 

1.  You  expressed  a  fear  that  under  a  more  competitive  system,  airlines  might 
abandon  unprofitable  routes,  severely  curtailing  service  to  many  communities. 
Would  you  please  provide  a  list  for  us  of  those  city-pairs  that  are  now  unprofit- 
able and  might  be  abandoned.  In  preparing  that  list,  you  should  specify  those 
city-pairs  of  which  the  cost  of  serving  exceeds  the  incremental  revenues  generated. 
I  ask  that  you  proceed  on  an  incremental  cost  basis  because  I  believe  that,  in 
competitive  industries,  services  and  products  are  provided  so  long  as  incremental 
revenues  exceed  incremental  costs.  Of  course,  if  you  wish  to  proceed  on  some  other 
accounting  basis,  please  feel  free  to  do  so  (but  I  should  then  appreciate  an 
appropriate  explanation). 

2.  It  may  be  that  the  "feeder"  line  argument  you  made  in  your  testimony 
amounts  to  more  than  a  simple  cross-subsidy  argument.  If  so,  will  you  please 
explain  it  more  fully  and  provide  empirical  support  ? 

3.  It  has  also  been  argued  that  a  competitive  airline  system  (of  the  sort  DOT 
suggested)  would  be  a  less  safe  system.  If  you  hold  this  view,  would  you  please 
provide  documentary  support  for  it? 

We  should  very  much  appreciate  receiving  this  information  before  our  last 
hearing  day  on  March  4.  as  we  shall  then  begin  to  write  our  report. 
Thank  you  very  much. 
Sincerely, 

Edward  M.  Kennedy, 
Chairman,  Subcommittee  on  Administrative  Practice  and  Procedure. 


Air  Transport  Association  of  America, 

Washington,  D.C.,  April  25,  J 97 5. 
Hon.  Edward  M.  Kennedy, 
U.S.  Senate, 
Washington,  B.C. 

Dear  Senator  Kennedy  :  During  my  testimony  to  your  Subcommittee  on  Ad- 
ministrative Practice  and  Procedure,  and  subsequently  by  letter,  you  requested 
specific  information  on  the  impact  of  deregulation  on  the  present  scheduled  air 
transportation  network.  You  asked  us  to  identify  present  scheduled  routes  where 


140 

service  might  be  reduced  or  eliminated  if  each  airline  could  set  its  own  prices  and 
could  enter  or  exit  any  market  at  will.  Additionally,  you  requested  further  ex- 
planation of  the  "feeder  line"  argument  and  some  comments  on  safety  under 
deregulation. 

The  attached  report  represents  the  results  of  the  analysis  that  ATA  performed 
in  response  to  your  requests,  and  includes  the  application  of  a  computerized 
analysis  of  the  large  interrelated  domestic  trunk  carrier  system.  We  believe  this 
information  may  represent  the  first  aggregate  analysis  of  its  kind.  Results  of 
the  analysis  reveal  the  adverse  impact  on  scheduled  air  service  that  might  take 
place  under  the  assumption  of  total  deregulation  that  we  were  asked  to  make. 

As  we  have  discussed  with  members  of  your  staff,  our  analysis  shows  that 
under  deregulation  scheduled  air  service  might  be  eliminated  or  substantially 
reduced  on  1,820  nonstop  routes  throughout  the  nation.  A  list  of  these  routes  is 
attached.  The  1,267  nonsubsidized  routes  of  the  regional  carriers  were  not  in- 
cluded in  this  study. 

Currently,  trunk  carriers  serve  994  nonstop  routes.  Of  these,  372  could  be 
candidates  for  elimination  under  deregulation,  while  nearly  all  of  the  remaining 
622  could  experience  sharp  curtailment  of  service.  Although  a  similar  analysis 
has  not  been  applied  to  the  regional  carriers,  we  have  identified  S26  of  their  non- 
stop routes  as  currently  receiving  direct  subsidy  under  regulatory  procedures. 

It  is  conceivable  that  the  1,198  unprofitable,  and  subsidized,  routes  might  not 
survive  in  a  deregulated  environment  except  in  limited  instances  as  an  adjunct 
to  more  profitable  routes  or  under  large  subsidy  payments  by  cities  or  the  Federal 
Government. 

Enclosed  are  maps  of  each  of  the  48  contiguous  states  and  the  District  of  Co- 
lumbia with  an  identification  of  each  of  the  routes  that  could  be  jeopardized  as 
well  as  a  tabular  listing  of  these  routes. 

Although  each  of  the  1,198  routes  would  be  a  candidate  for  elimination  under 
deregulation,  it  is  recognized  that  some  might  be  held  for  such  reasons  as  feed- 
ing heavier  travelled  routes  or  aircraft  positioning.  Some  also  might  be  served 
by  smaller  commuter  airlines.  However,  where  such  routes  would  remain,  there 
would  be  a  service  instability  not  present  today  because  carriers  would  view  these 
routes  as  marginal  and  would  probably  move  in  and  out  as  circumstances  dictated. 

Our  analysis  has  also  been  extended  to  determine  the  impact  on  levels  of  serv- 
ice in  a  situation  where  significant  fare  reductions  are  made.  We  have  done  this 
for  the  domestic  trunk  system.  The  findings  show,  for  example,  that  where  fares 
are  reduced  20  percent,  the  unprofitable  routes  rise  from  372  to  564. 

Some  have  contended  that  deregulation  could  occur  while  subsidy  remained. 
In  contrast  with  today's  subsidy  level  of  less  than  $70  million  for  regional  car- 
riers only,  we  estimate  that  subsidy  costs  under  deregulation  could  run  as  high 
as  $1  billion  annually. 

The  analysis  you  requested  has  produced  data  shedding  new  light  on  load 
factors.  The  analysis  shows,  for  example,  that  to  raise  the  average  system  load 
factor  from  55-60  percent,  solely  by  eliminating  the  lowest  load  factor  routes, 
could  require  dropping  as  many  as  144,000  monthly  flights,  or  37  percent  of  all 
flights  flown.  If  eliminating  unprofitable  routes  were  the  only  criteria  for  raising 
load  factors,  the  data  show  that  approximately  20,000  monthly  flights,  or  9  per- 
cent of  the  route  system,  would  need  to  be  abandoned. 

One  final  point  of  interest  in  the  analysis  is  that  33  of  the  largest  100  markets 
of  the  scheduled  carriers  had  load  factors  in  the  60-85  percent  range.  PSA's  load 
factor  on  the  Los  Angeles/San  Francisco  route  during  this  time  period  was  60.9 
percent.  Similarly,  if  interstate  scheduled  carriers  served  only  the  33  interstate 
high  load  factor  routes,  they  could  operate  more  profitably  and  at  lower  fares. 
However,  service  in  the  present  U.S.  58,000  city-pair  network  would  be  shattered. 

We  appreciate  this  opportunity  to  present  relevant  information  regarding  the 
public  service  impact  of  deregulation.  We  had  hoped  that  this  information  will 
be  reflected  in  the  Subcommittee's  report. 
Sincerely, 

George  W.  James, 
Senior  Vice  President-Economics  and  Finance. 

Attachment. 


141 


CONSEQUENCES  OF  DEREGULATION 
OF  THE  SCHEDULED  AIR  TRANSPORT  INDUSTRY 

An  Analytical  Approach 


S 


A  study  in  response  to  questions  posed  by  the 
Chairman,  Senate  Judiciary  Subcommittee 
on  Administrative    Practice  and  Procedure 

conducted  by 
The  Air  Transport   Association  of   America 


APRIL.   1975 


143 


TABLE  OF  CONTENTS 


Question  No.    1 


From  the  Subcommittee  Chairman,    regarding 

abandonment  of  unprofitable  routes 1 


Question  No.   2 


From  the  Subcommittee  Chairman,   regarding 

"feeder"  lines  and  cross  subsidy 10 


Question  No.   3 


From  the  Subcommittee  Chairman,   regcirding 

the  effect  of  deregulation  on  safety 12 


Indirect  Cost  Factor  Derivation 
(Including  Designation  of  Marginal  Cost  Elements) 


Exhibit  B 


U.S.   Scheduled  Airline 

1973  Routes  (city-pairs)  Risking 

Loss  of  Service  as  a 

Consequence  of  Deregulation 

(In  Order  from  the  Least  to 

the  Most  Unprofitable) 


City-Pairs  Risking  Loss  of  Service 
By  State 


City-Pairs  Risking  Curtailment  of  Service 
By  State 


144 


CONSEQUENCES  OF  DEREGULATION  -  AN  ANALYTICAL  APPROACH 


Question  No.    1 
From  the  Subcommittee  Chairman 


"You  expressed  a  fear  that  under  a  more  competitive 
system  airlines  might  abandon  unprofitable  routes, 
severely  curtailing  service  to  many  communities. 
Would  you  please  provide  a  list  for  us  of  those  city 
pairs  that  are  now  unprofitable  and  might  be  abandoned. 
In  preparing  that  list,   you  should  specify  those  city 
pairs  of  which  the  cost  of  serving  exceeds  the  incre- 
mental revenues  generated.     1  ask  that  you  proceed  on 
an  incremental  cost  basis  because  1  believe  that,   in 
competitive  industries,   service  and  products  are  pro- 
vided so  long  as  incremental  revenues  exceed  incremental 
costs.     Of  course,    if  you  wish  to  proceed  on  some  other 
accounting  basis,  please  feel  free  to  do  so  (but  I  should 
then  appreciate  an  appropriate  explanation). 


There  are  several  significant  ways  to  examine  incremental  revenue 
and  incremental  cost  on  the  U.  S.  domestic  airline  system,  including: 

1.  Use  of  macro-theoretical  models  of  the  airline  industry; 

2.  Examination  of  past  experience  with  unregulated  airline  markets; 

3.  Employment  of  a  detailed  analytical  framework  that  simulates 
each  element  of  the  actual  airline  system. 

The  first  approach  (use  of  macro-theoretical  models),  though  perhaps 
intellectually  elegant,   has  the  disadvantage  that  it  cannot  be  validated  -- 
conclusions  cannot  be  tested  against  reality.     Policy  recommendations  based 
on  this  approach  are  extremely  risky,  because  results  of  an  altered  air  trans- 
port system  could  easily  be  quite  different  from  those  predicted  by  the  model 
builders,   and  costs  to  rectify  unforeseen  consequences  could  be  enormous. 

The  second  approach  (examination  of  past  experience)  is  limited  by 
the  paucity  of  such  experience:    the  pre- 1938  era  in  the  United  States,   or  the 
pre- 1965  era  of  intra- California  air  transport.     While  the  chaos  experienced 
in  both  periods  represents  a  useful  point  of  comparison  with  the  current 
stable  regulated  environment  nationally  and  in  California,   in  many  respects 
both  periods  are  incomplete  for  current  analogy. 


145 


The  third  approach,    involving  a  detailed  route-by-route  examination 
of  the  existing  system,   has  been  chosen  as  the  best  way  to  meet  the  short- 
comings of  the  other  two  approaches.     ATA,   utilizing  an  existing  computer 
simulation*,   has  analyzed  the  entire  domestic  trunk  industry  for  the  48 
contiguous  states  for  1973.     Broad  conclusions  of  the  study  show  that,   of 
the  994  trunk  non-stop  routes,    622  were  profitable  and  372  (or  37%)  were 
unprofitable.     The  372  unprofitable  routes  are  prime  candidates  for  aban- 
donment under  deregulation,   recognizing  that  some  of  them  might  be  retained 
for  such  purposes  as  providing  feeder  service  and  positioning  of  aircraft. 
Some  also  might  be  served  by  smaller  commuter  airlines. 

In  contrast.   United  Airlines,    in  a  letter  to  the  Chairman  of  the  Senate 
Subcommittee  on  Administrative  Practice  and  Procedure,   pointed  out  the 
results  of  a  similar  analysis  on  its  route  system  showing  50%  of  its  non-stop 
routes  were  unprofitable. 


Airline  System  Simulation 

A  computer  program  known  as  the  Airline  System  Simulation,  which 
was  developed  by  and  is  the  property  of  the  Lockheed  Aircraft  Corporation, 
was  used  in  producing  a  substantial  portion  of  the  results  of  this  report. 

The  Airline  System  Simulation  is  the  result  of  extensive  research  in 
concepts  and  methods,   many  discussions  with  airline  representatives,   and 
participation  by  one  major  trunk  airline.     It  has  been  used  in  studies  for  air- 
lines,  the  United  States  Government,   and  Lockheed.     These  studies  have 
included  investigations  of  the  compositions  of  fleets,  the  assignment  of  flights, 
the  economics  of  the  supersonic  transport  (SST),   and  the  design  of  the  L-1011. 

The  simulation  has  been  in  continuous  use  since  1961.  It  is  important 
to  note  that  no  changes  were  made  in  the  Lockheed  model  in  order  to  perform 
the  simulation  of  this  study. 

The  srnulation  is  a  comprehensive  program  that  gives  explicit 
consideration  to  such  concepts  as  mixed  aircraft  types  on  a  route,   route 
interaction,   and  generation  and  allocation  of  demand,   all  of  which  are  ex- 
plained in  detaL  in  the  attached  booklet  on  the  Lockheed  Simulation  Model. 

Figure  1  is  a  summary  of  the  concepts  used  in  the  model. 


*  The  Lockheed  Airline  System  Simulation,   booklet  attached. 


51-146   O  -  76 


146 


MAXIMUM  EARNINGS 

•  COMPETITION 

•  REGULATION 


FLISHT  ASSIGNMENT  & 
FLEET  COMPOSITION 


AIRLINE  SYSTEM  SIMULATION  -  SUMMARY 


Data  Used  and  Comparative  Results 

Virtually  all  of  the  48  state  scheduled  domestic  trunk  passenger 
airline  system  for  the  calendar  year  1973  was  used  in  this  study.     994  non- 
stop route  segments  were  included  in  the  simulation.     Where  both  trunk  and 
regional  airlines  serve  the  same  segment,   their  traffic  is  included  in  the 
segment  total. 

The  following  types  of  aircraft  were  used  in  the  study  as  representa- 
tive of  the  actual  fleet  mix  in  1973: 


B-747 

L-lOll/DC-10 

DC-8-61 

B-707-300B/DC-8 

B-727-200 

DC-9-30/B-737 

DC-9-10 


147 


Since  all  passenger  aircraft  carry  significant  amounts  of  cargo, 
this  source  of  revenue  and  cost  was  included  in  the  study.     CAB  Form  41 
data  were  converted  to  an  average  amount  of  cargo  per  passenger.     These 
data  ranged  from  42  pounds  per  passenger  in  the  B-747  to  27  pounds  per 
passenger  in  the  DC-9-10.     The  overall  domestic  cargo  yield  for  U.S. 
trunk  carriers  in  1973  of  25.6  cents  per  ton  mile  was  used.     All-cargo 
aircraft  are  not  included  in  the  study. 

This  simulated  representation  captured  97.8  per  cent  of  the  revenue 
passenger  miles  as  reported  in  Form  41  to  the  Civil  Aeronautics  Board  (CAB). 
The  remaining  RPM's  were  contained  in  seasonal  markets  (those  served  less 
than  ten  months  per  year)  and  flight  diversions  due  to  weather  or  equipment 
problems. 

As  additional  points  of  comparison,   a  yield  of  6.  37  cents  per  :-evenue 
passenger  mile  was  achieved  from  the  simulation.     This  compares  favorably 
with  the  CAB  Form  41  figure  of  6.  38  cents.     The  average  flight  segment 
length  produced  by  the  simulation  was  580  statute  miles.     The  CAB  Form  41 
data  reports  577. 


Methodology  Employed 

The  Lockheed  Airline  System  Simulation  operates  through  a  sequential 
process  of  adding  flights  to  the  system  by  following  much  the  same  logical  pro- 
cess employed  by  airline  planning  staffs  in  developing  their  schedule  plans. 
Development  of  a  schedule  plan  begins  with  the  initial  assumption  of  no  flight 
operations  and  no  aircraft,   but  with  a  set  of  possible  routes  on  which  to  use 
the  aircraft.     The  economic  impact  of  each  possible  aircraft/route  combina- 
tion is  examined  in  sequence  as  shown  in  Figure  2.     Initially,   determination 
is  made  of  the  individual  increments  of  passenger  operating  revenue  and 
operating  costs  which  would  result  from  adding  a  flight  to  each  possible  route- 
with  each  possible  aircraft  type.     The  flight  addition  that  would  produce  the 
greatest  difference  between  the  increment  of  revenue  and  increment  of  cost 
is  then  added  to  the  system.     This  process  is  iterated  each  time  through  the 
994  route  segments  before  a  flight  is  added. 

The  costs  used  in  the  flight  selection  process  consist  of  only  those 
costs  directly  affected  by  the  addition  of  a  single  flight  (Figure  3  and  Exhibit  A). 
However,   the  total  costs  of  operating  at  any  given  scale  of  operation  consist 
of  the  marginal  costs  plus  those  other  costs  that  are  affected  only  by  an  over- 
all scale  of  operations,    i.e..   system  costs.  *    Therefore,   after  each  flight 
addition  is  made  on  the  basis  of  marginal  costs,  total  operating  costs  are 
adjusted  to  include  the  additional  system  costs. 


*  In  the  context  used  here  marginal  and  system  costs  equal  fully 
allocated  or  total  costs. 


148 


OLUtt 


149 


^ 

,'*« 


150 


FIGURE  3 

MARGINAL  COSTS 

Flight  Crew  Cabin  Attendant  Salary 
Fuel  and  Oil  and  Related  Expense 

Direct  Maintenance  Other  Passenger  Services 

Insurance  Aircraft  Handling 

Depreciation  Aircraft  Control 

Local  Expense  Landing  Fees 

Labor  -  Ground  Prop.   &  Equip.  Passenger  Handling 

Labor  -  Other  Services  Baggage  Handling 

Maintenance  Materials  Passenger  Commissions 
Food  and  Beverages 


The  selection  and  updating  process  is  continued  until  no  flight,   either 
in  the  form  of  an  added  frequency  on  a  route  already  selected  for  service  or 
a  first  flight  on  a  route  as  yet  unserved,   can  be  added  to  the  system  and  pro- 
duce an  increment  of  revenue  greater  than  the  required  increment  of  marginal 
cost.     Thus,   at  this  point,   the  system  consists  only  of  those  services  that  will 
produce  a  maximum  operating  profit. 

An  examination  of  the  composition  of  the  system  as  it  would  exist  at 
maximum  operating  profit  requires  several  important  observations: 

1.  No  airline  presently  operates  at  or  near  this  point; 

2.  Load  factors  at  this  point  would  be  about  80%.     Therefore,   large 
numbers  of  people  desiring  service  during  peak  periods  of  the 
day,   week,   and  season  would  be  unable  to  travel  by  air; 

3.  Many  routes  that  are  now  being  served  would  receive  no  service; 

4.  Many  other  routes  would  receive  less  frequent  service  than 
currently  provided. 


Results  of  ATA  Study 

Application  of  the  Model. 

The  simulation  model  produces  an  ordered  list  of  non-stop  routes 
served,   starting  with  the  most  profitable  route/aircraft  combination,   and 
adding  flights  until  all  profitable  flights  are  listed  in  decreasing  order  of 
profitability.     The  simulation  then  continues  to  list  unprofitable  flights, 
starting  with  the  least  unprofitable  and  proceeding  to  the  most  unprofitable. 


151 


From  this  listing,   it  is  possible  to  construct  a  graph  of  system 
earnings  versus  number  of  flights  (Figure  4),   depicting  the  earnings  per 
day  for  each  level  of  service.     Figure  4  shows  that,   as  more  and  more  un- 
profitable flights  are  added  to  the  system,   daily  earnings  and  load  factors 
decrease. 

Figures  5A,    5B,    5C,   and  5D  depict  the  U.S.   trunk  48-state  system, 
divided  into  four  subsystems  employed  in  the  simulation,   and  Figure  6  repre- 
sents the  372  currently  served  non-stop  trunk  routes  identified  by  the  simulation 
as  unprofitable  and  consequently  risking  loss  of  service  in  the  event  of  deregu- 
lation.    These  372  unprofitable  routes  are  tabulated  in  Exhibit  B.     Figure  7 
sets  forth  the  826  subsidized  regional  carrier  markets  that  would  also  risk 
loss  of  service  in  a  deregulated  environment. 

Thus,   in  the  event  of  deregulation,   routes  appearing  in  Figures  6  and 
7  can  be  considered  as  prime  candidates  for  abandonment.     Not  included  are 
other  unprofitable  markets  currently  served  by  regional  carriers  and  not 
eligible  for  subsidy. 

Exhibit  C  presents  the  unprofitable  and  subsidized  routes  on  a  state- 
by-state  basis. 

Exhibit  D  lists  all  profitable  routes  in  the  trunk  system,  showing  the 
reduced  level  of  service  that  might  be  experienced  with  a  maximum  earnings 
objective. 

Effect  of  Fare  Reductions 


In  addition  to  consideration  of  the  system  under  1973  fare  levels,  the 
analysis  was  extended  to  explore  conditions  where  these  levels  were  reduced 
10  and  20%. 

Results  of  running  those  two  hypothetical  cases  are  shown  in  Figi. 


The  upper  curve  is  identical  to  Figure  4,    indicating  the  results  of  1973  opera- 
tion at  1973  yields.     Other  curves  show  the  results  which  could  have  been 
expected  in  1973  if  fares  had  been  reduced  10%  and  20%,   respectively. 

Figure  9  demonstrates  these  results  in  tabular  form  --as  fares 
decrease,   the  maximum  earnings  and  number  of  profitable  flights  are  lower. 
Further,    if  fares  were  reduced  10%,   there  would  be  an  increase  in  the  number 
of  unprofitable  routes  from  372  to  471.     In  the  case  of  20%  fare  reduction,   un- 
profitable routes  rise  from  372  to  564. 


152 


XI 

"1 

hI 

H 
O 

^ 
P 
^ 

J 

M 

\M 

w 

z 

m 

A 

■^ 

K 

O 

< 

<s 

j5 

Yy 

Z 

Ui 

<; 

X 

w 

H 

^ 

ro 

w 

H 

U) 

>H 

H 

'< 

H 

CO 

•* 

"I 

f 

g 

fe 

^^ 

J. 

^ 

^ 

-J 

, 

'^7 

^ 



if 

^ 

^ 

..^ 

c^ 


suonniM  $ 


153 


154 


155 


J   s 


a: 


(0 
UJ 

>     S 
!     O 

i     ui 

'     I- 

< 

0) 


?  -r 


'  .  "f^/; 


■•',  -.'//I 


^''' 


r^K^r;  j/ 


I       1  -  °l  "5 


J   K    "J.        J 


i  :!'="    I 


>  4        ^  *  ^:  ;"  ^  i' 


156 


!^     I" 

lU        (A 

1  g 


D 
I        1 


3  J 


,    <,■ 


157 


-,.""'''»  ,;•)?' 


4    5 


UJ  UJ 

UJ  (£ 


S5io  I 

-I  OC  t^    o) 
U.  )-  o>    <1> 


V;3-\f^T>V^ 


5^'^^- 


i  s° 

i     a.  lu 


;■  '>.-. 


/ 


/i^^^  * 


^■i*«.sS«Hs^Jvi,'. 


158 


O  I   . 


Z  c 

UJ  (U 

^"  - 

Ui  T-  CO 

tn  ^ 

H  «> 

X 

O 


[I 


< 
o 
o 


^-> 


/>  ;.    ■■■•  ■■*-,  f''^\< 


Hi 


^'.>  ^ 


1  rV-^ 


7- 

\S" 

J     ^ 

%•  -i;^;.  - 

■      A 

t   .' 


'i^.\,- 


I    f,  J 


/?     ?  iJi 


159 


t^ 

2: 

c: 

H 

<" 

^- 

^ 

<« 

UJ 

fil 

C 

?', 

tf 

■D 

<; 

(S 

w 

2 

Lj 

K 

m 

H 

> 

4) 

J 

U> 

W 

fa 

r" 

<; 

S 

"  i 


suonniAi  $ 


160 


FIGURE  9 

SOME  EFFECTS  OF  REDUCED  FARES 

Maximum 

Number  of 

Number  of 

Daily 

Profitable 

Unprofitable 

Yields 

Earnings 
(Millions) 

Flights 

Non-Stop  Routes 

1973  Yields 

$5.5 

2.500 

372 

10%  Reduct 

:ion 

4.3 

2.170 

471 

2  0%  Reduction 

3.1 

1,978 

564 

In  making  these  simulation  runs,   it  was  assumed  that  elasticity  of 
demand  was  -1.2.     This  figure  is  the  assumption  for  discount  fares  only 
adopted  by  the  Civil  Aeronautics  Board  in  its  computation  of  the  adjusted 
return  on  investment.     The  CAB  elasticity  factor  for  all  fares,   however,    was 
-0.  7.     For  purposes  of  this  analysis  only,   to  test  the  hypothesis  that  a  dis- 
proportionate increase  in  demand  would  still  reduce  service,    it  is  assumed 
that  a  10%  decrease  in  fares  would  result  in  a  13%  increase  in  demand,   and 
a  20%  decrease  would  result  in  a  31%  increase  in  demand.  * 

The  results  of  examining  the  system  at  10%  and  20%  yield  reduction 
show  that  lowering  of  fares,    for  example,   by  new  competitors  free  of  regula- 
tory restraint,   would  increasingly  result  in  economic  pressures  to  abandon 
unprofitable  routes.     Further,   the  number  of  candidates  for  discontinuation 
of  service  increases  as  fares  decrease. 

Load  Factors 

It  should  be  emphasized  that  the  ATA  study  demonstrates  that  achieve- 
ment of  high  load  factors  is  not  necessarily  consistent  with  a  high  level  of 
service  to  communities  across  the  nation.     For  example,  two  ways  of  achieving 
higher  system  load  factors  would  be  to  remove  service  to  those  communities 
with  the  lowest  load  factors  and/or  abandon  unprofitable  routes. 

•        Abandonment  of  lowest  load  factor  flights.     In  order  to  determine  the 
impact  of  this  method  of  raising  system  load  factors  from  55%  to  60%, 
ATA  arrayed  all  flights  for  August,    1973,   from  lowest  to  highest  load 
factors,   using  segment  data  (ER-586)  for  trunk  and  local  service  air- 
lines.    Figure  10  is  a  summary  of  these  data. 

System  load  factor  for  that  month  was  55,  7%.     In  order  to  raise  the 
system  load  factor  to  60%,    it  would  have  been  necessary  to  eliminate 
144.000  flights  during  the  month,  or  37%  of  all  flights  (Figure  11). 


This  uses  the  CAB  calculation  of  elasticity  impact. 


161 


o  o 

o  d 
o  o 


li 


-1  in  o  c^ 


E  -5^ 


o  r>  -.  in  -H  . 


of  o 
en  J 


o  ro  c-  00  Tj. 


to   00   -<   m 


Oinoinoinoino 


S"  o 

00  J 


__^mcno5cno5mi^(ncnaio)030)03OTcncnaio> 

°  S  g  S  S  S'  2  S  S"  S  S  ?  S  5?  S  S  w  ^  "^  ■*' 


162 


ANALYSIS  OF  FLIGHT/SEGMENT  LOAD  FACTORS 

U.S.   Certificated  Airlines 

48  State  Services 

August,    1973 


Number  of  Flights  Requiring  Elimination  From  Lowest  Load 
Factors  to  Raise  System  Average  From  55.  7%  to: 


Number 

Percent 

Highest 

of 

of  All 

Load  Factor 

Flights 

Flights 

Remaining 

60% 

144.000 

37.0 

49.3% 

65% 

226.000 

58.1 

56.0% 

70% 

296.000 

76.1 

62.2% 

75% 

340.000 

87.3 

6  7.5% 

80% 

365.000 

93.7 

7  3.2% 

Notes:     (1)    Average  load  factor  for  the  segment  is  used  for 
each  flight  flown  on  that  segment. 

(2)    Segments  with  less  than  four  services  per  month 
not  included. 


163 


The  remaining  system  would  exclude  flights  for  which  the  average 
monthly  load  factor  was  49.3%  or  less.     To  raise  the  system  load 
factor  to  65%.   a  total  of  226,000  flights  (or  58.  1%  of  all  flights) 
would  have  had  to  be  eliminated.     At  65%  load  factor,   flights  with 
average  monthly  load  factor  of  56%  or  lower  would  be  eliminated. 

These  data  do  not  take  into  account  the  fact  that  some  of  the  traffic 
on  discontinued  flights  would  be  diverted  to  other  flights.     Some 
segments,   however,   would  lose  all  service. 

An  illustration  of  a  typical  monthly  distribution  of  load  factors  is 
shown  in  Figure  12,   using  the  August,    1973  data. 

•        Abandonment  of  the  most  unprofitable  flights.     Use  of  the  Lockheed 
Airline  System  Simulation  makes  it  possible  to  determine  the  impact 
of  raising  load  factors  by  eliminating  the  most  unprofitable  flights. 
If  trunk  airlines  were  to  pursue  this  policy  alternative,   approximately 
20,000  monthly  flights,   or  9%  of  total  trunk  service,   would  be  aban- 
doned in  order  to  raise  load  factors  to  60%.     41,  000  monthly  flights 
would  be  eliminated  to  reach  a  65%  load  factor. 

A  significant  consideration  with  respect  to  the  impact  of  high  average 
load  factors  on  public  service  is  the  problem  of  unserved  demand.     Experience 
with  airline  reservations  systems  makes  it  clear  that  some  passengers  cannot 
obtain  confirmed  reservations  on  flights  that  finally  depart  with  80%  load 
factors.     This  phenomenon  results  from  the  practice  of  passengers  booking 
reservations  and  failing  to  cancel  if  the  reservations  are  not  used.     In  this 
case  other  passengers  will  have  been  turned  down  because  the  flight  appeared 
to  be  fully  booked.     During  peak  vacation  periods,   this  situation  is  particularly 
acute. 

Previous  analysis  has  shown  that  increasing  average  load  factors  would 
result  in  curtailment  of  service.     But  average  load  factors  do  not  fully  account 
for  the  extent  to  which  the  public  is  inconvenienced.     Examination  of  actual 
monthly  flight  load  factor  data,    in  a  special  ATA  study,    shows  that,    even  with 
average  route  load  factors'  as  low  as  40%,   many  individual  flights  on  these 
routes  carry  load  factors  in  the  70  to  90%  range.     This  means  that,   at  certain 
times  of  the  day  and  on  certain  days  of  the  week,   hundreds  of  passengers  are 
turned  away  on  flights  of  their  choice  even  though,   on  the  average  for  the 
month,   60%  of  the  seats  in  the  system  are  empty.     Demand  is  highly  peaked 
by  hour  of  the  day,   by  day  of  the  week,   by  season,   and  by  direction. 

These  findings  demonstrate  that  passengers  must  forego  travel  or 
change  their  plans  to  travel  at  less  convenient  times  even  when  load  factors 
are  at  a  system  average  of  55%. 


164 


5 

r 

o 

(, 

<! 

<!" 

T) 

> 

i^ 

1- 

Q 

n 

w 

< 

;rt 

<u 

n 

'r! 

nl 

J 

C^ 

H 

C) 

00 

?^ 

^ 

W 

CD 

p 

(000) 
s;m3iU  jo  JaquinN 


165 


Conclusions 

Currently  U.S.   scheduled  trunk  and  regional  carriers  serve  3,087 
non-stop  routes  which  link  58,000  city  pairs  throughout  the  U.S.    Of  these, 
1.  158  (or  37.5%)  are  unprofitable  and  risk  abandonment  under  deregulation. 
Nearly  all  of  the  remaining  1,929  routes  might  well  experience  significant 
reduction  in  service. 

Where  certain  of  the  unprofitable  or  subsidized  routes  might  be  held 
for  such  purposes  as  providing  feeder  traffic,   aircraft  positioning,   or  market 
growth,   or  might  be  served  by  smaller  commuter  airlines,   these  routes  could 
be  subject  to  instability  not  present  today,   since  carriers  would  be  competing 
for  them  as  marginal  routes  and  would  move  in  and  out  as  current  circum- 
stances dictated. 

Attempting  to  subsidize  these  routes,  to  try  to  maintain  today's  level 
of  service,   could  require  as  much  as  a  billion  dollars. 

Further,  raising  average  system  load  factors  has  a  public  service 
penalty  attached  to  it.  Most  particularly,  this  occurs  with  an  increase  in 
denied  service  during  certain  daily,   weekly,   and  monthly  peak  periods. 

Accordingly,   as  this  study  demonstrates,   under  a  deregulated  system 
the  level  of  service  available  to  the  public  could  be  markedly  reduced. 


166 


Question  No.   2 
From  the  Subcommittee  Chairman 


"it  may  be  that  the  'feeder'  line  argument  you 
made  in  your  testimony  amounts  to  more  than 
a  simple  cross  subsidy  argument.     If  so,   will 
you  please  explain  it  more  fully  and  provide 
empirical  support? 


As  the  question  implies,  the  concept  of  cross  subsidization*  appears 
simple  at  first  glance.     In  practice  it  is  complex,   and  the  variety  of  attitudes, 
beliefs,   and  opinions  on  the  subject  reflected  in  the  testimony  before  the 
Subcommittee  amply  demonstrate  that  complexity. 

The  single  essential  point  that  must  be  understood  is  that  a  form  of 
cross  subsidy  begins  when  a  system  exists  with  only  one  non-stop  route. 
Costs  of  operating  a  route  vary  by  time  of  day,   season  of  the  year,   weather 
conditions,   and  by  many  other  factors.     Thus,  to  completely  eliminate  the 
effect  of  cross  subsidization  is  not  possible  on  one  non-stop  route  in  each 
system,   let  alone  on  an  entire  system. 

The  efficient  deployment  of  aircraft  and  other  airline  resources 
across  the  national  air  transportation  network  requires  their  use  on  a  com- 
bination of  non-stop,   multi- segment,   and  connecting  routes  where  the  optimum 
application  of  resources  is  normally  not  possible.     For  example,   an  aircraft 
can  seldom  be  operated  on  the  optimum  distance  for  which  it  was  designed. 
When  it  is,   however,   per  mile  costs  are  less  than  on  its  other  routes,   and 
a  form  of  cross  subsidy  occurs. 

As  ATA  reported  in  its  February  6  testimony  before  the  Subcommittee, 
the  national  air  transportation  system  is  comprised  of  many  connecting  and 
through  flights,   constituting  a  network  of  service  throughout  the  58,  000  city 
pairs  served  by  scheduled  airlines.     These  connecting  and  one-stop  and  multi- 
stop  flights  exist  in  part  because  segments  (connecting  or  through)  that  may 
be  individually  unprofitable  can  be  combined  to  make  a  total  profitable  flight. 
Consider  three  cities  --  A,   B,   and  C  --  and  suppose  that  traffic  between 
each  of  the  three  pairs  (AB,   BC,   AC)  is  too  light  to  justify  even  a  single 
daily  flight.     If,   however,   one  flight  is  operated  from  A  to  B  to  C.   the  seg- 
ment from  A  to  B  may  still  be  unprofitable  but  the  segment  from  B  to  C, 
bolstered  by  traffic  from  A  destined  for  C,   may  now  be  profitable  enough  to 
make  the  flight  as  a  whole  profitable.     In  such  a  situation,   it  could  be  said 
that  passengers  destined  from  B  to  C  subsidize  passengers  destined  from 
A  to  B.     But  what  about  passengers  destined  from  A  to  C?    They  are 
"recipients"  on  one  segment  (A  to  B)  and  "donors"  on  the  other  (B  to  C). 


Sometimes  viewed  as  "internal  subsidization 


167 


Availability  of  a  high  degree  of  scheduled  frequency  to  communities, 
large,   medium,   and  small  in  terms  of  population  across  the  nation,   is  un- 
paralleled in  the  world.     The  operation  of  this  network,   however,   requires 
a  high  percentage  of  multi-stop  and  connecting  flights.     Approximately  70% 
of  scheduled  carrier  operations  involves  multi-stop  flights. 

Every  passenger  or  shipper  using  the  comprehensive,   integrated 
system  receives  a  clear  economic  benefit  flowing  from  that  system  --  the 
ability  of  anyone  to  get  almost  anywhere  in  the  country  on  a  regularly 
scheduled  basis,   on  business,   on  personal  emergency,   or  for  any  other 
reason. 

The  effect  of  cross  subsidy,  therefore,  is  to  render  operable  an 
essentially  self-supporting,  comprehensive,  integrated  national  air  trans- 
portation system.  Without  it,  that  system  would  disintegrate.  If  the  many 
smaller  or  medium  sized  communities  now  receiving  service  through  con- 
necting or  through  flight  feeder  operations  are  to  receive  adequate  service, 
absent  the  present  self-supporting  system  self-financed  by  cross  subsidy, 
large  direct  subsidies  would  be  required  in  order  to  provide  service  at  the 
levels  now  available. 


168 


Question  No.    3 
From  the  Subcommittee  Chairman 


"it  has  been  argued  that  a  competitive  airline 
system  (of  the  sort  DOT  suggested)  would  be  a 
less  safe  system.     If  you  hold  this  view,   would 
you  please  provide  documentary  support  for  it? 


The  impact  of  deregulation  on  safety  is  not  susceptible  to  ready 
measurement  and  one  cannot  predict  with  certainty  what  that  impact  might 
be. 

In  light  of  the  consequences  of  the  operation  of  a  less  stable  air 
transport  industry  resulting  from  deregulation  and  related  shifts  in  service 
patterns,   one  must  presume  that  the  Federal  Aviation  Administration  would 
continue  to  take  all  actions  necessary  in  the  public  interest  to  assure  the 
highest  possible  level  of  safety  for  all  operations  within  its  statutory 
jurisdiction. 


EXHIBIT  A 

INDIRECT  COST  FACTOR  DERIVATION 
(INCLUDING  DESIGNATION  OF  MARGINAL  COST  ELEMENTS) 


170 


Hi 

: 

: 

: 

' 

: 

z 

: 

: 

: 

s 

ill 

III 

il 

II: 

5 

s 
1 

1 
1 

J 
i 

1 
1 

1 
I 

1 
1 
1 

1 

I 

i 
1 
1 

i 
% 

ill 

ill 

1! 

II 

iii 

° 

s 

1 

1 

8 

1 

1 

1 

iii 

0 

'Hi 

i 

i 

1 

g 

*: 

s 

S 

S 

§ 
»" 

? 

i: 

s 
S 
a 

1 

iiti- 

£ 

ii.f. 

II; 

1 

1 

H 

m 

■.Ml. 

ip 

ft 

i 
<i 

1 

a" 
<i 

1 

2 

i  3 1 

d= 

thi 

mi 

w 

i 

ii. 

ir 

:    i 

m 

1 

3 

i 

I 
l 

!i- 

iirii 

! 

< 

$' 

liii 

r 

til  - 

lis  = 

d 

1 

ll= 

ipfli 

j 

3< 

1 

1 S 

1 

d 

5 

if- 

!iN 

i 

<<] 

i 

2 

-  3 

"5j 

1 

1  1 

n 

it 

1 

if! 

III 

hi 

M 
nil 

s 

A 
fi 

I 

I 

1 

i 
1 

1 

■■I 

ill 

Ii 

It 

ii 

1 

1 
1 

ll 

Ii 
1! 

Eli 

I 

III 


ill  Pi 


ife: 


.6  5    & 


.fin 


171 


EXHIBIT  B 


U.  S.  SCHEDULED  AIRLINE 
1973  ROUTES  (CITY-PAIRS)  RISKING 

LOSS  OF  SERVICE  AS  A 

CONSEQUENCE  OF  DEREGULATION 

(IN  ORDER  FROM  THE  LEAST  TO 

THE  MOST  UNPROFITABLE) 


172 


Page  1 


1. 

ATL-CAE 

2. 

MCO-MIA 

3, 

JAN- MS  Y 

4. 

PBI-TPA 

5. 

DSM-STL 

6. 

ABE-CLE 

7. 

GFK-MSP 

8. 

PHF-WAS 

9. 

CHS-JAX 

10. 

CMH-PIT 

11. 

BAL-NYC 

12. 

BOI-SLC 

13. 

DAL-IAH 

14. 

JAX-TPA 

15. 

ABE- WAS 

16. 

ATL-TYS 

17. 

DAL- SAT 

18. 

BNA-TYS 

19. 

CLE-CVG 

20. 

DTW-MKE 

21. 

CRW-CVG 

22. 

CRW-PIT 

23. 

LEX-TYS 

24. 

ATL-AVL 

25. 

EVV-STL 

26. 

CHS-CLT 

27. 

MCI-STL 

28. 

PHX-SAN 

29. 

CMH-DTW 

30. 

ALB-NYC 

31. 

LIT-MEM 

32. 

ORD-STL 

33. 

IND-STL 

34. 

DTW-IND 

35. 

DSM-MSP 

36. 

MCO-PBI 

37. 

CLE-SBN 

38. 

ORE- WAS 

39. 

DTW-ORD 

40. 

EVV-IND 

Tex. 


Tex. 


Atlanta,  Ga. 

Orlando,    Fla. 

Jackson/Vicksburg,   Miss, 

West  Palm  Beach,    Fla. 

Des  Moines,   Iowa 

Allentown,    Pa. 

Grand  Forks.   N.  D. 

Newport  News,    Va. 

Charleston.   S.  C. 

Columbus,   Ohio 

Baltimore,   Md. 

Boise,   Id. 

Dallas/ Ft.    Worth, 

Jacksonville,    Fla. 

Allentown.    Pa. 

Atlanta.  Ga. 

Dallas/ Ft.    Worth. 

Nashville,   Tenn. 

Cleveland,  Ohio 

Detroit,   Mich.    (Metropolitan) 

Charleston,   W.  Va. 

Charleston,   W.  Va. 

Lexington,  Ky, 

Atlanta,   Ga. 

Evansville,   Ind. 

Charleston.   S.C. 

Kansas  City.   Mo. 

Phoenix.   Ariz. 

Columbus.   Ohio 

Albany.   N.Y. 

Little  Rock,   Ark. 

Chicago,   111.    (O'Hare) 

Indianapolis,    Ind. 

Detroit,   Mich.    (Metropolitan) 

Des  Moines,   Iowa 

Orlando,    Fla. 

Cleveland,   Ohio 

Norfolk.   Va. 

Detroit,    Mich.    (Metropolitan) 

Evansville,   Ind. 


Columbia,   S.C. 

Miami.   Fla. 

New  Orleans.    La. 

Tampa,    Fla. 

St.    Louis,   Mo. 

Cleveland,   Ohio 

Minneapolis/St.    Paul.    Minn. 

Washington.   D.C. 

Jacksonville.    Fla. 

Pittsburgh.    Pa. 

New  York,   N.Y. 

Salt  Lake  City,   Utah 

Houston,   Tex. 

Tampa,    Fla. 

Washington,   D.C. 

Knoxville,   Tenn. 

San  Antonio,   Tex. 

Knoxville,   Tenn. 

Cincinnati.   Ohio 

Milwaukee.   Wis. 

Cincinnati.  Ohio 

Pittsburgh.   Pa. 

Knoxville.   Tenn. 

Asheville,   N.C. 

St.   Louis,   Mo. 

Charlotte,  N.C. 

St.   Louis,   Mo. 

San  Diego,   Calif. 

Detroit,    Mich,    (Metropolitan) 

New  York,   N.Y. 

Memphis.   Tenn. 

St.    Louis.   Mo. 

St.    Louis,    Mo. 

Indianapolis.    Ind. 

Minneapolis/St.    Paul.   Minn, 

West  Palm  Beach.    Fla. 

South  Bend.   Ind. 

Washington.   D.C. 

Chicago,    111.   (O'Hare) 

Indianapolis,   Ind. 


173 


Page 


41. 

DAL-TUL 

42. 

CLE-IND 

43. 

BUF-SYR 

44. 

AGS-ATL 

45. 

CVG-ORD 

46. 

NYC-PVD 

47. 

IND-ORD 

48. 

ATL-MGM 

49. 

DAY-ORD 

50. 

GEG-GTF 

51. 

NYC-ORH 

52. 

BOI-GEG 

53. 

MCI-TUL 

54. 

MCI-SGF 

55. 

CLE-GRR 

56. 

IND-SDF 

57. 

PHL-WAS 

58. 

ATL-GSP 

59. 

lAH-SAT 

60. 

FSM-LIT 

61. 

JAN-MLU 

62. 

MIA-MLB 

63. 

MBS-ORD 

64. 

JAX-TLH 

65, 

CVG-SDF 

66. 

CLT-RDU 

67. 

DAY-DTW 

68. 

CID-ORD 

69. 

MOB-MSY 

70. 

ATL-BHM 

71. 

SBA-SFO 

72. 

RDU-RIC 

73. 

CLE-FWA 

74. 

BNA-SDF 

75. 

MLI-OMA 

76. 

DAL-OKC 

77. 

BAL-RDU 

78. 

ELP-TUS 

79. 

JAX-MCO 

80. 

A  US -DAL 

Dallas/ Ft.    Worth.   Tex. 

Cleveland,   Ohio 

Buffalo,   N.Y. 

Augusta,   Ga. 

Cincinnati,  Ohio 

New  York,   N.Y. 

Indianapolis,    Ind. 

Atlanta,   Ga. 

Dayton,   Ohio 

Spokane,   Wash. 

New  York,   N.Y. 

Boise,    Id. 

Kansas  City,    Mo. 

Kansas  City,   Mo. 

Cleveland,  Ohio 

Indianapolis,    Ind. 

Philadelphia,    Pa. 

Atlanta,   Ga. 

Houston,   Tex. 

Ft.   Smith,   Ark. 

Jackson/ Vicksburg,    Miss. 

Miami.    Fla. 

Saginaw,    Mich. 

Jacksonville,    Fla. 

Cincinnati,   Ohio 

Charlotte,   N.C. 

Dayton,   Ohio 

Cedar  Rapids /Iowa  City,   la. 

Mobile,   Ala. 

Atlanta,   Ga. 

Santa  Barbara,   Calif. 

Raleigh/ Durham,   N.C. 

Cleveland,   Ohio 

Nashville,   Tenn. 

Moline,    HI. 

Dallas/ Ft.    Worth.   Tex. 

Baltimore,    Md. 

El  Paso.   Texas 

Jacksonville,    Fla. 

Austin,   Tex. 


Tulsa,  Okla. 
Indianapolis,    Ind. 
Syracuse,   N.Y. 
Atlanta,   Ga. 
Chicago,   111.    (O'Hare) 
Providence,   R.I. 
Chicago,    111.    (O'Hare) 
Montgomery,   Ala. 
Chicago,    111.    (O'Hare) 
Great  Falls.   Mont. 
Worcester,   Mass. 
Spokane,    Wash. 
Tulsa,  Okla. 
Springfield,    Mo. 
Grand  Rapids,    Mich. 
Louisville,   Ky. 
Washington,   D.C. 
Greenville/Spartanburg,   S.C. 
San  Antonio,   Tex. 
Little  Rock.   Ark. 
Monroe,    La. 
Melbourne,    Fla. 
Chicago,   111.    (O'Hare) 
Tallahassee,   Fla. 
Louisville,   Ky. 
Raleigh/ Durham,   N.C. 
Detroit,    Mich.    (Metropolitan) 
Chicago,    111.    (O'Hare) 
New  Orleans,    La. 
Birmingham,   Ala. 
San  Francisco,   Calif. 
Richmond,    Va. 
Ft.    Wayne,    Ind. 
Louisville,  Ky. 
Omaha,   Neb. 
Oklahoma  City,   Okla. 
Raleigh/Durham,   N.C. 
Tucson,   Ariz. 
Orlando,    Fla. 
Dallas /Ft.  Worth,   Tex. 


174 


Page  3 


81. 

ICT-MCI 

Wichita.   Kan. 

Kansas  City.    Mo. 

82. 

ORD-TOL 

Chicago.   Ul.    (O'Hare) 

Toledo.   Ohio 

83. 

FLL-MCO 

Ft.    Lauderdale,    Fla. 

Orlando,    Fla. 

84. 

CLE-PIT 

Cleveland.   Ohio 

Pittsburgh,    Pa. 

85. 

ESF-SHV 

Alexandria.   La. 

Shreveport,    La. 

86. 

FNT-ORD 

Flint.    Mich. 

Chicago,   111.    (O'Hare) 

87. 

BAL-BDL 

Baltimore.   Md. 

Hartford.   Conn. 

88. 

CLE- DAY 

Cleveland.   Ohio 

Dayton.  Ohio 

80. 

MCI-OMA 

Kansas  City.    Mo. 

Omaha,   Neb. 

90. 

LAS-SAN 

Las  Vegas.   Nev. 

San  Diego.   Calif. 

91. 

PFN-PNS 

Panama  City,    Fla. 

Pensacola.    Fla. 

92. 

CRP-DEN 

Casper,   Wyo. 

Denver.   Colo. 

93. 

PHX-PSP 

Phoenix,   Ariz. 

Palm  Springs.   Calif. 

94. 

JAX-SAV 

Jacksonville,    Fla. 

Savannah,   Ga. 

95. 

RIC-WAS 

Richmond,    Va. 

Washington,    D.  C. 

96. 

DAL-MLU 

Dallas/ Ft.   Worth,   Tex. 

Monroe,    La. 

97. 

CRP-IAH 

Corpus  Christi,   Tex. 

Houston,   Tex. 

98. 

FSM-TUL 

Ft.   Smith,    Ark. 

Tulsa,  Okla. 

99. 

PIT-ROA 

Pittsburgh,    Pa. 

Roanoke,   Va. 

100. 

CAE-CHS 

Columbia,   S.  C. 

Charleston.   S.C. 

101. 

CMH-TOL 

Columbus,   Ohio 

Toledo.  Ohio 

102. 

MLI-ORD 

Moline.    m. 

Chicago.    111.    (O'Hare) 

103. 

BOS-PWM 

Boston,    Mass. 

Portland.    Maine 

104. 

FMY-MIA 

Fort  Myers,    Fla. 

Miami.    Fla. 

105. 

DSM-MCI 

Des  Moines,   Iowa 

Kansas  City,   Mo. 

106. 

LAS- LAX 

Las  Vegas,   Nev. 

Los  Angeles,    Calif. 

107. 

AUS-IAH 

Austin,   Tex. 

Houston,    Tex. 

108. 

DAB-JAX 

Daytona  Beach,    Fla. 

Jacksonville,    Fla. 

109. 

FAT -LAX 

Fresno,   Calif. 

Los  Angeles,   Calif. 

110. 

MLU-SHV 

Monroe,    La, 

Shreveport,    La. 

111. 

CMH-IND 

Columbus,   Ohio 

Indianapolis,    Ind. 

112. 

LAN-ORD 

Lansing,    Mich. 

Chicago,    ni.    (O'Hare) 

113. 

MLB-TPA 

Melbourne.    F.'a. 

Tampa,    Fla. 

114. 

FMY-TPA 

Fort  Myers.    Fla. 

Tampa,    Fla. 

115. 

BNA-STL 

Nashville.   Tenn. 

St.    Louis,   Mo. 

116. 

CLE-MBS 

Cleveland.   Ohio 

Saginaw,   Mich. 

117. 

EVV-SDF 

Evansville.   Ind. 

Louisville,  Ky. 

118. 

EEN-NYC 

Keene.   N.  H. 

New  York,  N.Y. 

119. 

ATL-CHA 

Atlanta.   Ga, 

Chattanooga,   Tenn. 

120. 

BDL-NYC 

Hartford.   Conn. 

New  York,    N.Y. 

175 


Page  4 


121. 

BOS-BTV 

Boston.    Mass. 

122. 

ICT-OKC 

Wichita,   Kan. 

123. 

BFL-SFO 

Bakersfield.   Calif. 

124. 

MEM- PAH 

Memphis,    Tenn. 

125. 

AMA-ICT 

Amarillo.   Tex. 

126. 

DAL-ICT 

Dallas /Ft.    Worth,   Tex. 

127. 

G EG- SEA 

Spokane,   Wash. 

128. 

LIT-SGF 

Little  Rock.   Ark. 

129. 

ABQ-ELP 

Albuquerque,    N. M. 

130. 

FAR-MSP 

Fargo,   N.D. 

131. 

FWA-ORD 

Ft.    Wayne,    Ind. 

132. 

FSD-MSP 

Sioux  Falls,    S.  D. 

133. 

DEN-GJT 

Denver,    Colo. 

134. 

MSN-MSP 

Madison,    Wis. 

135, 

CLE-LAN 

Cleveland.   Ohio 

136. 

GSO-RIC 

Greensboro/High  Point, 

N.C, 

137. 

ICT-TUL 

Wichita.  Kan. 

138. 

BAL-PHF 

Baltimore.   Md. 

139. 

CLE-FNT 

Cleveland,   Ohio 

140. 

BAL-ORF 

Baltimore,   Md. 

141. 

BPT-SHV 

Beaumont/ Port  Arthur, 

Tex. 

142. 

GRR-ORD 

Grand  Rapids.    Mich. 

143. 

AVL-CRW 

Asheville.   N.C. 

144. 

OKC-TUL 

Oklahoma  City.   Okla. 

145. 

ABQ-AMA 

Albuquerque.   N. M. 

146. 

CLE-CMH 

Cleveland,   Ohio 

147. 

ROC-SYR 

Rochester.   N.Y. 

148. 

FAT-SFO 

Fresno.   Calif. 

149. 

RNO-SFO 

Reno.  Nev. 

150. 

CHA-TYS 

Chattanooga.   Tenn. 

151. 

BTR-SHV 

Baton  Rouge.    La. 

152. 

LBB-MAF 

Lubbock.   Tex. 

153. 

FSD-PIR 

Sioux  Falls,    S.  D. 

154. 

BTR-ESF 

Baton  Rouge,    La. 

155. 

ELP-MAF 

El  Paso,    Tex. 

156. 

GEG-MSO 

Spokane,    Wash. 

157. 

BHM-PNS 

Birmingham,   Ala. 

158. 

DAY-IND 

Dayton,   Ohio 

159. 

BGR-PWM 

Bangor,   Me. 

160. 

FSM-SHV 

Ft.   Smith.   Ark. 

Burlington,   Vt. 
Oklahoma  City,   Okla. 
San  Francisco,   Calif. 
Paducah,   Ky. 
Wichita,   Kan. 
Wichita,   Kan. 
Seattle,    Wash. 
Springfield,    Mo. 
El  Paso,   Tex. 

Minneapolis/St.   Paul.    Minn. 
Chicago,    111.    (O'Hare) 
Minneapolis/St.    Paul,    Minn. 
Grand  Junction,    Colo. 
Minneapolis /St.    Paul,    Minn. 
Lansing,    Mich. 
Richmond.    Va. 
Tulsa.  Okla. 
Newport  News,    Va. 
Flint,    Mich. 
Norfolk,   Va. 
Shreveport,    La. 
Chicago,   III.    (O'Hare) 
Charleston,    W.  Va. 
Tulsa.   Okla. 
Amarillo,   Tex. 
Columbus,   Ohio 
Syracuse.   N.  Y. 
San  Francisco.   Calif. 
San  Francisco,   Calif. 
Knoxville.   Tenn. 
Shreveport.    La. 
Midland/Odessa.   Tex. 
Pierre.   S.D. 
Alexandria.    La. 
Midland/Odessa,   Tex. 
Missoula.   Mont. 
Pensacola,    Fla. 
Indianapolis,   Ind. 
Portland,   Me. 
Shreveport,    La. 


176 


Page  5 


161. 

CLE-DTW 

Cleveland.  Ohio 

162. 

CVG-MSP 

Cincinnati,  Ohio 

163. 

CLT-GSP 

Charlotte.  N.C. 

164. 

BIL-GTF 

Billings,   Mont. 

165. 

CAK-YNG 

Akron/ Canton.   Ohio 

166. 

ATL-MCN 

Atlanta,  Ga, 

167. 

CVG-IND 

Cincinnati,  Ohio 

168. 

CMH-CVG 

Columbus,   Ohio 

169. 

CHA-CVG 

Chattanooga,   Tenn. 

170. 

MCO-TPA 

Orlando.    Fla. 

171. 

PFN-TLH 

Panama  City,    Fla. 

172. 

AGS-CLT 

Augusta,   Ga. 

173. 

BTR-MSY 

Baton  Rouge,   La. 

174. 

MKG-ORD 

Muskegon,   Mich. 

175. 

PDT-PDX 

Pendleton.   Ore. 

176. 

BOI-PDT 

Boise.  Id. 

177. 

PIH-SLC 

Pocatello.   Id. 

178. 

ATL-CSG 

Atlanta.  Ga. 

179. 

CLE-TOL 

Cleveland.  Ohio 

180. 

FWA-IND 

Ft.   Wayne.   Ind. 

181. 

CLT-GSO 

Charlotte.   N.C. 

182. 

AVP-WAS 

Wilkes- Barre/Scranton.    Pa, 

183. 

AMA-LBB 

AmarUlo.   Texas 

184. 

PBI-TLH 

West  Palm  Beach.   Fla. 

185. 

IDA-SLC 

Idaho  Falls,   Id. 

186. 

CHS-SAV 

Charleston,   S.  C. 

187. 

CRP-RAP 

Casper,   Wyo. 

188. 

CVG-LEX 

Cincinnati,  Ohio 

189. 

CLE-CRW 

Cleveland,  Ohio 

190. 

CAK-PIT 

Akron/ Canton.  Ohio 

191. 

JMS-MSP 

Jamestown,  N.  D. 

192. 

CAE-CLT 

Columbia,   S.  C. 

193. 

BIL-BZN 

Billings.   Mont 

194. 

DSM-OMA 

Des  Moines,   Iowa 

195. 

PDX-SEA 

Portland,  Ore. 

196. 

BAL-PHL 

Baltimore,   Md. 

197. 

LEX-SDF 

Lexington,  Ky. 

198. 

BDL-BOS 

Hartford,   Conn. 

199. 

BIL-CRP 

Billings,    Mont. 

200. 

NYC-PHL 

New  York.   N.Y. 

Detroit,   Mich.   (Metropolitan) 
Minneapolis /St.    Paul,   Minn. 
Greenville/Spartanburg.   S.C. 
Great  Falls.  Mont. 
Youngstown.   Ohio 
Macon.   Ga. 
Indianapolis.  Ind. 
Cincinnati,  Ohio 
Cincinnati,  Ohio 
Tampa,   Fla. 
Tallahassee,    Fla. 
Charlotte,   N.C. 
New  Orleans.   La. 
Chicago.   Ul.    (O'Hare) 
Portland.  Ore. 
Pendleton,   Ore. 
Salt  Lake  City.   Utah 
Columbus,   Ga. 
Toledo,   Ohio 
Indianapolis,   Ind. 
Greensboro/High  Point,   N.C. 
Washington,   D.  C. 
Lubbock,   Texas 
Tallahassee,   Fla. 
Salt  Lake  City,   Utah 
Savannah,  Ga. 
Rapid  City,   S.D. 
Lexington,   Ky. 
Charleston,   W.  Va. 
Pittsburgh,   Pa. 
Minneapolis /St.   Paul,   Minn. 
Charlotte,   N.C. 
Bozeman,   Mont. 
Omaha,  Neb. 
Seattle,   Wash. 
Philadelphia,   Pa. 
Louisville,  Ky. 
Boston,   Mass. 
Casper,   Wyo. 
Philadelphia,   Pa. 


177 


Page  6 


201. 

BIL-HLN 

Billings.   Mont. 

202. 

BTM-IDA 

Butte.   Mont. 

203. 

GSO-ROA 

Greensboro/High  Point,   N.C. 

204. 

MIA-PBI 

Miami,    Fla. 

205. 

FIR-RAP 

Pierre.   S.  D. 

206. 

MOB-PNS 

Mobile.   Ala. 

207, 

PHX-TUS 

Phoenix,   Ariz. 

208. 

MSN-ORD 

Madison,    Wis. 

209. 

BFL-LAX 

Bakersfield.   Calif. 

210. 

CID-OMA 

Cedar  Rapids/Iowa  City.    la. 

211. 

FLL-PBI 

Ft.    Lauderdale.    Fla. 

212. 

DTW/FWA 

Detroit,   Mich.   (Metropolitan) 

213, 

BDL-PVD 

Hartford.   Conn. 

214. 

GSO-RDU 

Greensboro/High  Point,   N.C. 

215. 

MSN-RST 

Madison.   Wis. 

216. 

FMY-SRQ 

Fort  Myers.    Fla. 

217, 

AGS-CAE 

Augusta.   Ga. 

218, 

PSP-TUS 

Palm  Springs,   Calif. 

219. 

CSG-MGM 

Columbus.   Ga. 

220. 

LAX-SBA 

Los  Angeles.   Calif. 

221. 

CYS-DEN 

Cheyenne.    Wyo. 

222. 

ELP-SFO 

El  Paso.   Tex. 

223. 

BIS-FAR 

Bismarck.   N.  D. 

224. 

SAN-SFO 

San  Diego.    Calif. 

225. 

EUG-PDX 

Eugene.  Ore. 

226, 

DAB- T  PA 

Daytona  Beach,    Fla. 

227. 

LAX- SAN 

Los  Angeles,    Calif. 

228. 

ORD-SBN 

Chicago,   111. 

229. 

LAX-PSP 

Los  Angeles.    Calif. 

230. 

PDX-STL 

Portland,  Ore. 

231. 

AVL-RDU 

Asheville.   N.C, 

232. 

RNO-SMF 

Reno.  Nev, 

233. 

EUG-MFR 

Eugene,  Ore. 

234. 

DAY- LAX 

Dayton.  Ohio 

235. 

CHA-LEX 

Chattanooga,   Tenn. 

236. 

CRP-CYS 

Casper,   Wyo. 

237. 

CID-DSM 

Cedar  Rapids/Iowa  City.   la. 

238. 

LAX-VIS 

Los  Angeles,   Calif, 

239. 

COS-OKC 

Colorado  Springs.   Colo. 

240. 

JAN-MEI 

Jackson/Vicksburg.   Miss. 

Helena.    Mont. 
Idaho  Falls.    Id. 
Roanoke.    Va. 
West  Palm  Beach,   Fla. 
Rapid  City.   S.  D. 
Pensacola,    Fla. 
Tucson.   Ariz. 
Chicago,   111.    (O'Hare) 
Los  Angeles,   Calif. 
Omaha,   Neb. 
West  Palm  Beach,   Fla. 
Ft.    Wayne,   Ind, 
Providence,    R.I. 
Raleigh/ Durham,   N.C. 
Rochester,   Minn. 
Sarasota.    Fla. 
Columbia,   S.C. 
Tucson,   Ariz. 
Montgomery,   Ala. 
Santa  Barbara,   Calif. 
Denver,   Colo. 
San  Francisco,   Calif. 
Fargo,   N.D. 
San  Francisco.   Calif. 
Portland.   Ore. 
Tampa,    Fla, 
San  Diego.   Calif, 
South  Bend,    Ind. 
Palm  Springs.    Calif. 
St.   Louis.   Mo. 
Raleigh/ Durham,  N.C. 
Sacramento.   Calif. 
Medford.   Ore. 
Los  Angeles.    Calif. 
Lexington,   Ky. 
Cheyenne,   Wyo. 
Des  Moines.    la, 
Visalia,   Calif. 
Oklahoma  City.   Okla. 
Meridian.   Miss. 


51-146   O  -  76  -  pt.  1 


178 


Page  7 


241. 

SHV-TUL 

Shreveport,   La. 

242. 

BHM-BNA 

Birmingham,   Ala. 

243. 

HLN-MSO 

Helena.   Mont. 

244. 

EVV-PAH 

EvansvUle.   Ind. 

245. 

CVG-LAX 

Cincinnati,  Ohio 

246. 

PIT-YNG 

Pittsburgh.   Pa. 

247. 

BUF-ROC 

Buffalo.   N.Y. 

248. 

CID-MLI 

Cedar  Rapids/Iowa  City,   la. 

249. 

BAL-LAS 

Baltimore.   Md. 

250. 

CMH-DAY 

Columbus,  Ohio 

251. 

BTM-SLC 

Butte.    Mont. 

252. 

MKE-MSN 

MUwaukee.  Wis. 

253. 

MRY-SFO 

Monterey.    Calif. 

254. 

LAW-OKC 

Lawton,   Okla. 

255. 

MSP- EST 

Minneapolis/St.    Paul,   Minn. 

256. 

BTM-GEG 

Butte,   Mont. 

257. 

AVL-TYS 

Asheville.   N.  C. 

258. 

NYC-TUL 

New  York,   N.Y. 

259. 

SFO-SMF 

San  Francisco,   Calif. 

260. 

AGS-SAV 

Augusta,   Ga. 

261. 

SEA- WAS 

Seattle,   Wash. 

262. 

SAN-TUS 

San  Diego,   Calif. 

263. 

FWA-SBN 

Ft.    Wayne,   Ind. 

264. 

LBB-SPS 

Lubbock,   Tex. 

265. 

BAL-WAS 

Baltimore.   Md. 

266. 

COS-DEN 

Colorado  Springs.   Colo. 

267. 

MCI-OKC 

Kansas  City.   Mo. 

268. 

SCK-SFO 

Stockton.   Calif. 

269. 

SRQ-TPA 

Sarasota.   Fla. 

270. 

DSM-MLI 

Des  Moines.   Iowa 

271. 

AUS-ELP 

Austin.   Tex. 

272. 

BIL-FAR 

Billings.   Mont. 

273. 

MKE-SFO 

Milwaukee.   Wis. 

274. 

MCI-TUS 

Kansas  City.   Mo. 

2  75. 

MKE-ORD 

Milwaukee.   Wis. 

276. 

DTW-MSY 

Detroit.   Mich.    (Metropolitan) 

277. 

CAK-NYC 

Akron/ Canton.  Ohio 

278. 

BTM-BZN 

Butte.   Mont. 

279. 

CLT-DTW 

Charlotte.  N.  C. 

280. 

FWA-NYC 

Ft.   Wayne.   Ind. 

Tulsa,  Okla. 

Nashville.  Tenn. 

Missoula.   Mont. 

Paducah.  Ky. 

Los  Angeles.   Calif. 

Youngstown.  Ohio 

Rochester,  N.Y. 

Moline,   111. 

Las  Vegas.  Nev. 

Dayton,  Ohio 

Salt  Lake  City,   Utah 

Madison,    Wis. 

San  Francisco,   Calif. 

Oklahoma  City,  Okla. 

Rochester,   Minn. 

Spokane,   Wash. 

Knoxville,    Tenn. 

Tulsa,  Okla. 

Sacramento.   Calif. 

Savannah.   Ga. 

Washington.   D.  C. 

Tucson,   Ariz. 

South  Bend,   Ind. 

Wichita  Falls,   Tex. 

Washington,   D.  C. 

Denver,   Colo. 

Oklahoma  City,  Okla. 

San  Francisco,   Calif. 

Tampa,   Fla. 

Moline,   111. 

El  Paso,   Tex. 

Fargo,   N.D. 

San  Francisco,   Calif. 

Tucson,   Ariz. 

Chicago,    ni.    (O'Hare) 

New  Orleans.    La. 

New  York,   N.Y. 

Bozeman,   Mont. 

Detroit,   Mich.    (Metropolitan) 

New  York.   N.Y. 


179 


Page 


281. 

FAR-GFK 

Fargo,   N.D. 

282. 

OMA-PDX 

Omaha.   Neb. 

283. 

ORF-PHF 

Norfolk.   Va. 

284. 

NYC-OMA 

New  York.   N.  Y. 

285. 

FLL-MIA 

Ft.   Lauderdale.    Fla. 

286. 

FNT-MBS 

Flint.   Mich. 

287. 

IND-LEX 

Indianapolis.   Ind. 

288. 

CHA-CMH 

Chattanooga.   Term. 

289. 

AUS-SAT 

Austin.   Tex. 

290. 

CLT-DAB 

Charlotte.   N.  C. 

291, 

CHA-SDF 

Chattanooga.   Tenn. 

292. 

IDA-PIH 

Idaho  Falls.   Id. 

293. 

ABE-AVP 

Allentown.    Pa. 

294, 

LAS-TPA 

Las  Vegas.  Nev. 

295. 

LNK-OMA 

Lincoln.   Neb, 

296. 

CLT-RIC 

Charlotte.   N,  C. 

297. 

HSV-BNA 

HuntsvUle/Decatur,   Ala. 

298. 

lAH-MCI 

Houston.   Tex. 

299, 

BPT-IAH 

Beaumont /Port  Arthur.    Tex. 

300. 

BFL-SBA 

Bakersfield.   Calif. 

301. 

CRP-SHR 

Casper.   Wyo. 

302. 

DTW-TOL 

Detroit.   Mich.    (Metropolitan) 

303. 

DAB-MCO 

Daytona  Beach.    Fla, 

304. 

BFL-FAT 

Bakersfield.   Calif. 

305, 

MSP-SAN 

Minneapolis/ St,    Paul,   Minn. 

306, 

BAL-BUF 

Baltimore,   Md. 

307. 

BIS-JMS 

Bismarck.   N.D, 

308. 

EKO-RNO 

Elko,   Nev. 

309. 

DAY-SDF 

Dayton.   Ohio 

310. 

MSY-OKC 

New  Orleans.    La. 

311. 

CVG-TOL 

Cincinnati.  Ohio 

312. 

BHM-MLU 

Birmingham.   Ala, 

313. 

ILG-WAS 

Wilmington,   Del, 

314. 

DAY-PHL 

Dayton,   Ohio 

315. 

BTM-HLN 

Butte.   Mont, 

316, 

BTM-GTF 

Butte.   Mont. 

317, 

MCE-VIS 

Merced,   Calif. 

318, 

MHT-ORH 

Manchester,   N.  H.  . 

319, 

JAX-MLB 

Jacksonville.    Fla. 

320, 

BAL-SEA 

Baltimore.   Md. 

Grand  Forks.   N.D, 
Portland.  Ore. 
Newport  News.   Va. 
Omaha.   Neb. 
Miami.    Fla. 
Saginaw.   Mich. 
Lexington.    Ky. 
Columbus,   Ohio 
San  Antonio.   Tex. 
Daytona  Beach,    Fla. 
Louisville,   Ky. 
Pocatello.    Id. 
Wilkes- Barre/Scranton. 
Tampa.    Fla, 
Omaha.  Neb. 
Richmond,    Va. 
Nashville,   Tenn. 
Kansas  City.   Mo, 
Houston.    Tex. 
Santa  Barbara,   Calif. 
Sheridan,   Wyo. 
Toledo.  Ohio 
Orlando.    Fla. 
Fresno.   Calif. 
San  Diego,   Calif. 
Buffalo,   N.  Y, 
Jamestown,   N.  D. 
Reno,   Nev. 
Louisville,   Ky. 
Oklahoma  City.  Okla. 
Toledo.   Ohio 
Monroe,   La. 
Washington,   D,  C, 
Philadelphia,    Pa. 
Helena,    Mont. 
Great  Falls,   Mont. 
Visalia,   Calif. 
Worcester,    Mass. 
Melbourne.   Fla. 
Seattle.   Wash, 


180 


Page  9 


321. 

BOS-IAH 

Boston.   Mass. 

322. 

CLT-JAX 

Charlotte,   N.C. 

323. 

EVV-MEM 

Evansville.   Ind. 

324. 

JAX-SRQ 

Jacksonville,    Fla. 

325. 

BTV-PWM 

Burlington,    Vt. 

326. 

GRR-MBS 

Grand  Rapids,    Mich. 

327. 

CVG-DAY 

Cincinnati,  Ohio 

328. 

MHT-PWM 

Manchester,   N.H. 

329. 

MOD-SCK 

Modesto,   Calif. 

330. 

BOS-PVD 

Boston,   Mass. 

331. 

BAL-ROC 

Baltimore,   Md. 

332. 

CMH-TYS 

Columbus,   Ohio 

333. 

ELP-IAH 

El  Paso,   Tex. 

334. 

BHM-TYS 

Birmingham,   Ala. 

335. 

MCE-MOD 

Merced,   Calif. 

336. 

EVV-LEX 

Evansville,   Ind. 

337. 

CHA-IND 

Chattanooga,   Tenn. 

338. 

MIA-SRQ 

Miami,    Fla. 

339. 

NEA-MCN 

Brunswick,   Ga. 

340. 

RDU-WAS 

Raleigh/ Durham,   N.C. 

341. 

CAK-CLE 

Akron/ Canton,  Ohio 

342. 

BHM-BTR 

Birmingham,   Ala. 

343. 

GNV-TLX 

Gainesville,   Fla. 

344. 

FNT-LAN 

Flint,    Mich. 

345. 

LAW-SPS 

Lawton,  Okla. 

346. 

GTF-HLN 

Great  Falls,   Mont. 

347. 

CID-LNK 

Cedar  Rapids/Iowa  City, 

la. 

348. 

FMY-MCO 

Fort  Myers,    Fla. 

349. 

PDX-SLE 

Portland,   Ore. 

350. 

BAL-HVN 

Baltimore,   Md. 

351. 

MKE-RST 

Milwaukee,   Wis. 

352. 

FWA-TOL 

Ft.   Wayne,   Ind. 

353. 

LEB-NYC 

Lebanon,   N.H. 

354. 

DAY-TOL 

Dayton,   Ohio 

355. 

MCO-MLB 

Orlando.    Fla. 

356. 

EKO-ELY 

Elko,  Nev. 

357. 

BOS-MHT 

Boston,    Mass. 

358. 

ELY-SLC 

Ely,   Nev. 

359. 

NEA-SAV 

Brunswick,   Ga. 

360. 

EWB-NYC 

New  Bedford,    Mass. 

Houston,   Texas 
Jacksonville.    Fla. 
Memphis.   Tenn. 
Sarasota,    Fla. 
Portland,   Me. 
Saginaw,    Mich. 
Dayton,   Ohio 
Portland,    Me. 
Stockton,   Calif. 
Providence,   R.I. 
Rochester,  N.  Y. 
Knoxville.   Tenn. 
Houston.   Tex. 
Knoxville.   Tenn. 
Modesto,   Calif. 
Lexington,   Ky. 
Indianapolis,    Ind. 
Sarasota,    Fla. 
Macon,   Ga. 
Washington,    D.  C. 
Cleveland,   Ohio 
Baton  Rouge,   La. 
Titusville,    Fla. 
Lansing,   Mich. 
Wichita  Falls,   Tex. 
Helena,   Mont. 
Lincoln,   Neb. 
Orlando,    Fla. 
Salem,   Ore. 
New  Haven,   Conn. 
Rochester,   Minn. 
Toledo,  Ohio 
New  York,  N.  Y. 
Toledo.  Ohio 
Melbourne,    Fla. 
Ely,   Nev. 
Manchester,  N.  H. 
Salt  Lake  City,   Utah 
Savannah,   Ga. 
New  York,  N.  Y. 


181 


Page  10 


361. 

DAB-FLL 

362. 

AGS-CHS 

363. 

EEN-LEB 

364. 

BIL-SHR 

365. 

CMH-LEX 

366, 

DSM-LNK 

367. 

BZN-HLN 

368. 

MHT-NYC 

369. 

BOS-EWB 

370. 

MOD-SFO 

371. 

JAX-NEA 

372. 

EEN-MHT 

Daytona  Beach,    FIs 
Augusta,   Ga. 
Keene.   N.  H. 
Billings,    Mont. 
Columbus,   Ohio 
Des  Moines,   Iowa 
Bozeman,    Mont. 
Manchester,   N.  H. 
Boston,    Mass. 
Modesto,   Calif. 
Jacksonville,    Fla. 
Keene,   N.  H. 


Ft.    Lauderdale,    Fla. 
Charleston,    S.  C. 
Lebanon.   N.  H. 
Sheridan,   Wyo. 
Lexington,   Ky. 
Lincoln,   Neb. 
Helena,   Moat. 
New  York,  N.  Y. 
New  Bedford,   Mass. 
San  Francisco,    Calif. 
Brunswick,   Ga. 
Manchester,  N.  H. 


182 


EXHIBIT  C 


CITY  PAIRS  RISKING  LOSS  OF  SERVICE 
BY  STATE 


183 


184 


oo 


iS 

?      iS  < 

M     . 

.2  »  ffl 

u 

QC   ClJ 

W  CM 

Ittanooi 
bile,   A 
ntgome 
scle  Sh 

to      , 

6  aS 

5^ 

J3     O     O     3 

u  2§  § 

O    3    S 

«r  «  :;!  ^  X 


<:  m  «  2  §  Q< 


•S  1 

O  at 

^  C 

(U  (1) 


|1 


185 


—t(i)tD 


.2  S    . 


.2  2 

K  .5 


186 


187 


m  < 


•  <:     ^  .2  <: 

rt    O  c    M  O  (0    o 


a 


pq  O 


si' 2* 


to  5! 


^  SS< 


^^ 

o" 

CO 

^  s.  X- 

(0  W  .3 

go 

(2 

to    E    0) 

—<   c 

C  ,^    o 

«    rt 

cc    nj  ^ 

a  c« 

W 

M  fc  fc 

188 


189 


^^ 


» 


^^-^^' 

^    ^-^    ^^-5    J^    ^ 

c  .S  0  .2  o 
S  2  «  3 

las/Ft, 
ettevil 
Spring 
sas  Ci 
le  Roc 
ihoma 
is.   Te 
Louis, 
3a,   Ok 

C^iiJ  s 

^   ^^   c  :^  ^   u       .i; 

cd    O   ti     •    p 

avsoa^a^ci-p 

E  K  J  m  H 

Q&hE!^JOPhwH 

5   B   a; 


2  O 


'  ^   a 


U 


190 


JH 


■s  -^ 

1^. 


1  s 

o  jS 


II 

31 


191 


192 


01    -^ 


m  o  - 

t«  <"  M 

m   c  PQ 

><  a 

en    CD  c 

cd    o  rt 

J  J  OT 


M    .2 

IS 


c  <  . 

<    01  g 

01    c  '-' 

O    rt  3 

J   M  PH 


5151 


"5 


y  rt      S 


S  J  ^  2  < 


Sh      3     -      CO 

U  W  §  CO 


o  ^ 


>■  u 


_0   o 


;;:|    eg  .  M  Q.  °fi5 

03     C       -    o     <U   W    .S   W 

ca.t3nJtinln!nlnl 


j2    d 
P4   H 


to  c:  o  o 
ni  ■-'  J2  3 
J  S  Ph  H 


T3  ^ 

O  cd 


193 


JS      -   cii 

III 
A  Ph  c5? 


o  2  O 

d  m  ra 

o  c  c 

W  OT  OT 


1)  ;:3 
O  U 


tin    o 
C 

"to    ^ 
^1 


a  5 

►li    CO 


.    ro  r  1 
a) 

OS  ^  ^ 

,0  ^    a. 

"D  5  o"  2 

W  CO  K  CO 


2S 


'^  U 

^  o 
.  o 
O    m 

C  '2 
<"    S 

B  t 

as  [jj 
CO   CO 


U 

2h 


^  =«•  "^ 


£5^  ^u 

^    nJ     '  U  ■ 

.  ^    O    n  ^ 


A    2    ^ 


S  .2 


W  fe  S  §  S  « 


CO    CO   CO    CO 


-146    O  -  76  -  pt. 


194 


195 


o  Z 
o     . 

"  § 

Q  tM 


^c5 


^"^ 


c  ^'  o  c  .i;  _r 


.  o 

<v  U 


— I   -J  ..;  x;   D 


u   o 

cfl     O 


^B 


o 


OO^JjggA 


o   § 


196 


u -t     o 


i  J     t 


fa  o  S  § 


u  a 

a  a 
<  J 


197 


O  7Z 

z 
o 


198 


m 

(0 

0) 

u 

> 

u 

V 

a 

en 

O 

T3 

0) 

N 

o 

-a 

M 

m 

Q) 

SI 

K 

nj    0) 


199 


200 


§>^' 


CD    a, 


O     .K 

o  ■-;   0) 
m    <n  '5' 


01  O 

&<     • 

Q 


■C    o 

■a  -5 


t«'  £  o 
5  2^ 


•2.  mZ 


2  £ 


H      S 


201 


s5 


\ 


202 


ii^ 


2         ^-  U    o  o 


.    .   <u  U'  ^  Z 


,  Q  2    S 


-a   o     .  o   o  en 


> 

'C 

u 

(H 

^ 

U 

T3 

1 

2 

2 

to 

^ 

« 

w 

^   t.       U  U  Q  O  ffi 


■?■  S  S  S  ra 


5    c    tm 
^  ?  S  o  3  ^ 


2j2Z2Kot^^^ 


U 

0 

nJ 

2 

> 

pi  6  . 

^ 

^ 

W 

(U 

(1( 

•a 

^ 

.•.'!> 

to 

~a) 

Q 

2 

>tQ..- 

c 

0 

o 

t! 

^"  "a!^   o 

C 

B 

a 

^ 

Slfl 

4) 

m 

01 

1 

!h  r:^  ^  o 

a 

QJ 

o  -c   CO  .ii 

<  pq  2  2  CL,  K  K 

OT 

^^ 

203 


^H 


--§1  -T— Z-OL-^^V'  ^ 


I  ^  /  s   /: 


c     2 


204 


s 

3        ^    ^ 

nj 

Is  SOS 

§ 

|g§ 

|5£  ^  c 

2 

|.2£ 

73    O    O    0)    CS 

:S  o  o 

<;  O  Q  Z  CM 

> 

<  O  Q 

^5 


U  fe  o 


E  O 


„-  PQ    S  .     - 

ti    n)    5i    O  <i    n) 

o  a  S  "o  o  S 


p    rt    nJ    >.  ■ 


UUQSOotw   fehS 


^   ^-  -3  .2  2 

£  £  §  §  ^ 


6  J?.^ 


m  S  ^ 


205 


•■3  u  E  6 

c  (d     .  ™ 
™  Ph  H  ^ 


--  ^  fe   t  ^ 
m    m  :;:!    CO    (D  t^ 


o  ^ 


206 


207 


-§5 


CO         *  <; 

5  I  s  I 


Soon) 

<  U  Q  O 


<  <  o 


•  <  i2     ■ 


<:  2  ^ 


^  ^  o  ^  g  5  ^-  o  c"  -3 

£  O    «J         o  w 


<;     „ 
-  "  <  S  o; 

cDEcoc(i;'aocnS;ii::i'e^crto-3-" 

C0Oti£l.^nl."rtil'0>~'3nJ3rt— '•-< 


'  E  ^'  «■  ^ 


^  s  1  £  i  i  s  g  §  s" 

tn3.3x;oot,E:"io 


.^6 

,  2   OT 

s:  s:  'o' 

u  u  u 


1    •  o 


1  S  w     S 


3  x:   !tf 


u 


208 


■       .       •   M 

o  o  2;    , 

OT   M   ij"    ^ 


s  "* 


05 

3   cd 
E  o 

O  > 


209 


51-146   O  -  76  -  pt.  1  -  15 


210 


15   o  oi5 

2  -S  •  rt  2 
-2-g2    . 

O  •-■  o    nJ    C 

-C    g  tn    o  -g 

J5    <u  rt    O    > 

2  J  fe  &<  H 


CD  •  x:  3) 

^  >  ,  cS 

^  .  (P  c  ^ 

t«  O  ^  nj  <S 

^  Si  i^  -^  ::i 

-g  "  CO  o  ca 

W  PL,  CO  W  > 


C  (l> 

c  iJ  o 

CU  rt  Q. 

dl  CO  w 


C   U 


J2 
Hi 

2  >^ 


u  3 


211 


°  o 

s  -I' 


212 


5^ 

o  ^ 


.  5  £  rt 
^  *  ■*-.   -  <l:  (u  i^ 


(D  ^'       .  ^   O   C 

1  ^   ^  "   •■ 


>^  o  P  0)  "M   9^ 


U     - 


■^-S 


el=^ 


.3"-^  ;s  .2      o 


w        U  fc  w 


u 


s-^i 


s^ 


S  «3 


i^ 


^  13 


>     3 


Q  O 


213 


CD     (S     ^ 

u  u  c 


-  "S  ti  o 

5  <S  £  u 

'-  "S  "2  £ 

o   o  «-   « 

t-  2:  X  ■= 


P  o 


a-       c  «   p 


214 


-a  a 


215 


ri    X     3     ?   T3 
^     0)     O    0^    rt    ^• 

£  hJ  J  §  a.  W 


'2  .2 

^"6 


U  U  Q  ►S  2;  H 


_■  O  o  O   o 


6s 


>     3 

ii     O 

u  u 


Q  Q 


o  ■§■ 

^-  O  " 

cti    a;  "^ 

y  ^  t! 

S  i!  o 

U  U  t^ 


CO  .SJ 


216 


o  < 


y 


217 


rt    W    O     T 

O     0)     C    i-J 


-     .    o     .  - 

>5  --|  >-'  ^  .  m 

U  "    ctf  "  fJ  "S 

rt    o  t;   a,  g   o 

§  S  O  Oh  K  OT 


x:    3   "i    o 
U  Q  2  § 


3^ 


O    S  u 


U  §  S  K 


II 


SiU 


Ǥ^ 


O  ;o 

0)    X) 


S  Z  n  :^  ^ 
CO  c  §-  „r  .- 


218 


§5 


S  rt  § 

U   O   M 


ca   o 


U 
13 


219 


220 


.  o 


S5 


s  J 


^,1 


5  (2 


o  Q      o  M 


a!  ^ 
'Si  o- 
c/3  i-i 


H  ^  ^  3     -<  3  S^ 
_c     .  g  ^  ^  .2       O     -. 


6    - 
o  ts 

Xi  Xi 


C    J     03 


PtnOOwMHH^ 


<  P 


n!    to 

O  H 


221 


222 


^'h 

o. 

,^^ 

.-^.^^ 

r-,           .     ^ 

r-i  dj 

^    Cd 

01     (U 

1# 

.Su 

1?    C 

u   Z 

O    i^ 

^00 

^    0    Cd    ^• 

•t:t 

tf  H 

U  H 

u  0  J 

U   J  0,  OT 

h  S 

ta  M 

"•o 

,-J     q; 

a  S 

.2  3 

bD  CO 

4)    .D 

K   3 

S^ 


.00 


£  I   i  S  S   ^ 

5  .s  -s  ^  I  § 

o  u  u  w  5  t^ 


§0       .-a 

-O   o 


■^5        d        >»  S 
-O   o  -'     'iii  C, 

O     ^    O    r-l      o      g     <D 


S  S  c  >  rt  -Sor 
i5  .3  o  g  c  g'  > 

u  U  Q  W  £  J  z 


Ufa 

W    J   S   OT 


223 


\    \ 


<: 

o  < 


.^\ 


T-^ 


3       V 


^V 


1 

\ 

\ 

r^ 

\    f- 

- — -V- 

^      T\ 

y 

V       '^ 

V         ^ 

\  / 

^^i' 

\      1' 

^ 

^^t  ' 

xvi.^ 

-7^ 

\ 

^^•'^J 

u> 

224 


§  ra 


CO  £i 
eiS    BJ 


II 


o    § 


.S  O 
J  z 


cd    tt) 
U  H 

"o     - 

~-    3       . 

•a   ^ 

V    -^     N 

rt     (U 

^     CD     S 

u  X 

£•1^ 

SI 

"d    rt    rt 

t-i    o 

OK  a 

H  J 

;<  J 


m  Q 


_<;  a 


-a  PC   o   B 

S     r-     E    1^ 

S  S  d  ^ 


S^lS   ^ 


I  cq  fe  E-i 


225 


51-146   O  -  76  -  pt.  1  -  16 


226 


ra  ^  ^  t; 

O     D     O     ™ 

m  s  Ph  ^ 


§      -^ 


Id' 


S)ll| 

c    m    ;^    g 

m  m  ra  § 


227 


228 


>H    o  Z  ^    ^ 


^njni(l)a>0<D£taO(p 


CQKJZZZZPh 


rt    o   a,  ^ 

K  K  w  ^ 


229 


230 


c  Z 


.  >" 


b    a  en  2 


.S  '^  O    w 

s  gtfs 


,  g  5  rt  -3  ^  f^  S 
^ ■  1)  -^  ^  J;5  S  S  iS  o 


)    s-    .-I 


.s§ 


"^     CO 


0)  M 

s     » 

>     5 


rt  b  ^ 

K  §  Z 


>•§ 


^•2  S 


,Ot^ 


t3   ^       , 


:  ffi  2  z  Hi  c^ 


-Z 

Si 

0)    o 
o  "^ 

22 


u 


231 


232 


■"  ^*  S  s      =3  3  §  ^ 
•b  .s  =3  -3,     -^  S  s  S5 


-gs 


0   ^ 

»  5 


H    c        •-<„ 


o§  § 


O  J  §  S  S  CO  H 


o  o 
O  6 


2  J 
>  .■ 


o      _:0 


O     §0^-^     c*rt"3^     O" 

rt  Si  ^  3  >,     -^  ^  ^ii 

xiSiiocd-J'S-^    (DO 


XI    ■" 

^  -  rt 

0   S§ 

?1 

o    S§K 

^-3  . 

t* 

nj  "S      -  "3 

sll 

o 

•y  ^s  S 

3 

O  U  E 

o 

U  O  fe  o 

o 


233 


3      CQ 

S  -3  C 


.y§ 


1^ 


g^ 


fq   o  -3 
c  S  ^ 

m     ^     O 


234 


235 


^^i3 


ii   o 


§^       §& 


O^^       U^ 


U 


0^.5,- 
.5    §     O    T3 


CO  w 

cm  0) 


r§ 


to  ^ 


236 


237 


-^ 


>0 


238 


H§ 


■<  §    S 


.2§ 


c  <u 


<;  <  §  § 


-"am 

O     3     3 

§  H  H 


S  s 


§§ 


v    u         ni    <u   aj 


H3 


<  § 


a  6 


no  m 

<L>   J2 

K 


o  5 


239 


£  < 

§  s  s 

a  flj 

C    ^     Q. 

15  ^  ^ 

S  ^ 

SJ|  s 

rt    rt    a; 

■-5   J   Z 

Ih= 

t,  y  <u 

240 


J^ 


W  M 


\ 


r 

I 


I  cJ 


^^^■ 

V- 



— r' 

1 

\^^/ " 

"^X^ 

CO 

1 

I 

1      'vv         ^ 

»! 

H 

=    w 

v^ 

^ 

g 

% 

►1 

\ 

3 

>.,^ 

O 

4 

241 


I  d  ^ 


U  S  Ah 


^^ 


fe  W  H 


.2  t:  S;    nj    ^    rt 
■O  "^        Jj    c    ^ 


2i 


Ssllll^ll 


•2  2 

0)  Si 
K 


I    .S  i-l     CI    m   J3 


:^  O 


0)  o  -!<!  E 
Q  K  O  O 


'w  H  H  ^ 


"^   CO   nj  :i 


XI    ti  t^ 


II 


242 


to 

m 

(1> 

u 

o 

u 

u 

t( 

(U 

d 

w 

O 

t3 

V 

0) 

N 

C 

0 

•a 

M 

(U 

« 

w 

3nja>(il-i-'"'±i^«>^Q. 
fflOQfefe§SOCL,0'co 


243 


244 


o§§ 


O  U  Q 


§  w 


Q 


S   ^2 


s     » 


5    c   o  fe 


^6  5 
m  m  § 


u 

3    O 
U    U 

H 
1=) 


245 


246 


U  m       a  hJ  o 


J  ^la 


•S  g  £ 

J  O  Q 


B  IS 


-o  -c  S^  o     . 

0)  C  (D  -S 

o  o  C  ^<  ►^     - 

C  fci  0)  (U     rH     b 


^  rt 

^    nl      . 

£  ^ 

^t° 

.  ° 

o  g 

.    I-H     "^i 

U)"  '"' 

" 

x>      * 

TJ       "    ^ 

-ii    03 

n.  a> 

a  <u  -ti 

«  o 

O     rn 

^  § 

^§     rt 

efl  ^ 

etf  "^    CO 

■s  s 

T3    to    C 

<u    0)    nl 

U  Q 

U  Q  i^ 

0)    o 


4)    V 

n(     ■ 
U 


247 


248 


u  c  B 
4)   m    Qfl 

M  fe  « 


sr<  to 


ni 
O    o 


Wc5?        CQJotH        Wotoo 


249 


250 


>> 


Si 

Boston,   Mas 
Lebanon,  N. 
New  York,   1 
Worcester, 

Ui 

111 

m  §  z 

^   u 

b  S 

«>  w 

^■o 

•-J     (U 

S  '^ 

o  y 

MM 

(u  XI 

«^ 

2    ^ 

D     D 

a  2 


0)    >H 


cj:^ 


251 


252 


-Z       (H 


2  5z 


rt    O   2  .2   M   <»    J-  rt 

j3  !a  .ii  r^  ™  <u  ni  -S 


§  2 
o  |3 

MOT 


;  2  ?' 


< 


rt  -o 


aj    0)   0)   "i    a»   fa 


253 


254 


3   o   o  u  ^.   o 


^1 


I  0,  5 

^  W  O 


5  <:  J  s 


S    n    t^    C    L,   ^    ni 
i2  ii    O    <U    3    CO    Sh 

^  ><  U  Q  Q  O  O 


n)  .5 


U 


255 


c  ^  -a  in 

a  c   S   a; 
OT    g    ™    ^ 


m 

(U 

u 

a; 

C 

> 

a 

OT 

U 

■a 

1 

(U 

O  TJl 

■nH 

U)  ml 

(U 

x> 

K 

^1 

(1)  ,0-0 

3  to    to    C 

^  >  |1h  :;:! 

<  U  W  § 


256 


257 


>h' 

0       2    . 

>h" 

CD 

o5     . 

c   o  ^ 

2 

(1) 
Z 

Z 

i§>^^^ 

2 

6..^^^  . 

»c5"p 

>^"|a:'   . 

|(S' 

;s 

0) 

-C 

o 
K 

o  ^    t.  >^  -Q 

§11  M 

m  o  w  2;  n. 

c 

0 

g 
cd 

1-5 

lit: 

U  Z  0.  p 

1  -  §  c 

O    M'J    2 

»:2  &  » 

O    t,    0)    rt 

«  cq  z  ^ 

W  2  £  p 

u    . 

Z  0, 

t  ^ 

^^ 

^^ 

1^ 

o  -v 

Mm 

<U   JO 

K^ 

o 

c 

(DO)       -    O;     "H  to 

J2   03     2   "O   "5    -*    m 


45JS20&.AH^ 


258 


ni  X 


3    C 


^  'fc!  :::; 


0)   ^"    (u        ^H    nj  :r^ 
J  §  Z       CQ  K  ^ 


^2 


259 


260 


nJCDfjOcnl— c 


O  § 


fe  ^  § 


u 


.2  Q)  >  cq 

•9  c  o  a; 

C  0)  en  ^ 

U  fe  ►?  §K  ^ 


C    i;   cd  .-I 

Q  S  K  H 


ni     •    «J     . 


to 


.en    .  -g  x:  '^ 

.  I  cd-  n  S  ^  ■;  -g  -  £ 
2  S  I  S  .t{  "  §  §  >  §  I 

miiSonCSScEo 

.a  £  .y  g 

K  C  «  « 


cd  S  S  2  S  I  S  .t{  2  §  2  > 

jS<dO  Q0cd.5>-.i3lUoOIU 

tZixIC  3jSO<d<Ut.rt-it, 

<;UW  <UUQQOh,«ci 


85 
"id  J3 


a  «  ^ 


u-S 


261 


CO 

S 
0 

> 

u 

U 

T3 

rt 

0) 

s 

■2 

0 

■p 

M 

OD 

0)  J2| 

« 

<^l 

U  J" 

2     , 

■So 

ra  zi  o  .t; 


"2 


u  u 

nj  Q  2 


2  «  ^  ^ 


u 

.  U  w  u" 


w 


•t;2 
o  2  ^-  >  2 


u 


p,    O  ^  0)    O    n)    ni 
fc-  a  §  22  K  ^ 


o 


6  S^^ 
"  ^2  - 


O   5    O    >^   O    «i 

U  fe  O  §  2  ^ 


262 


o      d 

u 

"■      "  .d 

tr.  'J  2 

2 J  _.• 

a,  Ga. 
eville,   N. 
n,   N.   G. 
burg,    Va. 
5  Beach,   S 
ern,   N.  C 
ngton,   D. 

ille,   N.  C 
a,   Ga. 
lie,   Va. 
sboro,   N. 
burg,   Va. 
!h,   N.   C. 
ke,   Va. 
ity  Airport 
ngton,   D. 

i;  «   >, 

55   o  S 

^^5-ga"S 

^c-sS-g-jguiH 

lit 

gZffi 

Gree 

Kins 
Norf 
Rich 

<  ti.  ;i:  J  S  2  ^ 

52 


263 


264 


u 


^5° 
2 


<J  Q  §  tf 


P 
15  Q 


O^ 


.'id 


SSh 


-i  oj   a 


Q  o  ^- 
►,•  S  ^ 

•  S    T3     O 


S 

:;3 
> 

a 

m 

Q 

fe 

; 

< 

H 

O 

M 

< 

D 

ffi 

H 

(4 

O 

. 

. 

z 

§R 

1 

g 

Q 

J§^ 

% 

s 

z 

B 

. 

d«. 

l3l 

m" 

m 

o  '^ 

.■|£ 

1 

a 

£'t 


S  S  o 


265 


266 


^2 


O   XI 


O  c 

O  >H      .  S  >•  a;              -g 

J-  c  nj  —  —    .-  •^ 

-     -  jr;    fe  ?  W) 

"^  •^   ab  S  o  o 


"  O 
m   g   o     - 


£  ^  O  o  .2  -g    .  "  ^\.  .Si  ^  I  " 


267 


.tu  .'^  d, 


^-  O  .2   o   „.  H  W 
cuo    -  5  ^  ■'^ 

ni   5  c  -ti  2  V  M  =' 


O     0)    Ji     CL 


■"  .2  .2 


O  § 


o   o 

x;  -rt    rt    0)  ^ 
U  U  Q  Q  ^ 


3    C 


t^  J  (i; 


g|1o §3 


;  o   o  x: 
i  J  -1  0. 


s  1 1  i  I  ■?  ^ 

S  .5  I  I  S?  ■  ■ 


5  u  u  u 


Q  Q  ti 


268 


\ 

\ 

\ 
\ 
s    \ 


s      1 

X 

X 

y  1 

6 

/^ 

s. 

\ 
\ 

/ 

C>; 

^  _/ 


/ 
/ 


269 


(n 

m 

o 

U 

1 

CO 

u 

73 

rt 

<U 

C 

O 

is 

<u 

-O 

K 

D 

OT 

O  CB 

CO  U 

u  c 

c8  O 


s  _  « 

S  3  ^ 

t^  c  ;::) 

rt  o  x: 

Ph  fu  M 


■S   ^    ci      -3 

.<  >;!  so 
^  £-  ;l  o  «  ^■ 

^  t  U     _     .0, 
^  "p    m    S    rt    rt 

w  £  ;^  -1  J  w 


(1)     g       .    M 

t;  c  c  o 

m   OT    .=:    ^ 


o  H  u 


2  rt   o  O 
:::!  c  ^  ? 


ni  CO 


u    ro    CO    to     n/    -J  ,  vw    -«- 


C    ^ 

rt    <u 


270 


271 


^  o 


3  *-  t; 

o   o   S 
E  Cl<  c/j 


">  o  ;2 

JJ  O  O 

3  «;  rt 

W  S  Oh 


U 


zi  n   c 


»* 


°  6 


O  "O 


4>     o    O    S     60   to 


9  ^ 


w  o  a:  v^  '^.  '^ 


272 


273 


t, 

0) 

<u 

•-< 
(-. 
u 

u 

0) 

w 

U 

T3 

N 

c 

o 

2 

M 

ra 

<u 

J3 

« 

■3 

W  2  ^ 


.2  -c" 


^^^        0. 


O       .t,2-gg3t, 

^•03        2;goj33 

C^hXI-  O-"t0J3 

u  w  i:  H^  §  0,  Oh 


a,    Oh   £ 


us 


U  OT  ^ 


2    o  2 

cfl    rt    oi    rt 
m  Q  2  ^ 


t^     o 


51-146   O  -  76  -  pt.  1 


274 


275 


00     In     ^ 
O     CD     (1) 

P  ffi  z 


■p    <u 
cd    0 


276 


277 


u  u 


2;  ^- 

o'  ^ 


<  o      <;  o  o 


o  "  3  o  3 


"3    M   >,^ 
-^     3    tfl     O 

<;  <  fe  a 


u 

2 


^  c  g  >  U  -g 

x;  S  0)  o  -^  nj 

m  ii  !h  c  S-.  x: 

<:  <;  O  M  H  U 


O  fe 


™    w  ii    °         ™    ° 


s 

m 

o 

^ 

"5! 

OJ 

u 

tn 

w 

ni 

_a) 

O 

3 

C 

rt 

3 

^H 

o 

H 

a 

c 

p 

278 


u 


I       2  (p-      (/i  Q 


a  c  0) 

O    o  m 


279 


280 


w 

U2 

u, 

> 

u 

0) 

a 

Crt 

O 

T3 

N 

c 

o 

T3 

M 

<D 

XI 

K 

3 

^ 

Q 

ni 

W 

z 

s 

t/2 

P 

_m 

o 

M 

^- 

OT* 

rt 

o 
u 

O 

0 

fa 

2 

3 

s  £ 

0 

1 

Q     . 

^   Q 
o  Z 

si 


?§ 


p  w 

J  2    2 


o   u   c 
u   a  --^ 

m  fe  S 


u  cu      §  Ph 


281 


282 


■?  t 


c  o 


O   > 

§-8 

U  J 


Or;  S 

-s  "^      t 


^-5 
OP. 


is  I  >; 

<;  m  o  t^ 


!?  c       •-  ^  ^ 


o  5,  o  ^  ;g  ;;; 


ti     t.     3    O 


CU   H   t3 


s  t 


rt 

o 

o 

m" 

UJ 

1^ 

O 

rt 

to" 

3 

a 

1 

oT 

1 

1 

g 

c 

3 
0 

<  u  u 

J  h3 

<  H  -i^    .  S 


<  M  § 

i  i  i 

E  'E  o 

2  .2  J 

C     D 


283 


c  .2 

.2  is 

0)   XI 


^  H  ^ 
wo™ 
cs  o  -a 

u^(2 


§  s 


t^      .    CD 


j=  :^  ^  ■?  o. 


J  J  K  ^ 


284 


285 


H    o 


3    C 


g   o   aj   2   o 

.  o  H  H  "o 

2  U     .       U 


2  ffi  o  S  -i 

>  c  -Q  r-i  -^ 

O  C  ^  T!  0) 

,i;  CD  3  r^  3 

u  J  J  S  a, 


-  ^  c 

o    CJ    dJ 

J    hJ    § 


o  U 


;7*     (n 


<     kJ     ^ 


£h.2 
%-| 

Q    ffi   OT 


r      H 


h:^^5 


K  §  O  H  ^ 


aT  5  £  £  "  - 

3   c  o  a  tn  c 

_Q     CO  3  T3  c  " 

<;  <i  K  §  w  H 


^    en 
O    ni 


286 


%  t 


J 


5^    to  H  < 


U     ID 

■^  ^  ;^  >d  ^  •  H  -^  „-   -  >< 

-•Sg    -^  S  °  2  S 

^-  !3  ^  ^  §  I  ^  S  -  ^ 


HH 


<;  J  S 


c 

•a  . 

U  .  cfl 

"©■So; 

•a  O  H 

CO  a 

o  >   tT 

'-<  j:;   ^ 

W  M  H 


s  t 


a)    d 


U 
^  -1=1 


287 


be    • 

2  ^ 
'u     . 


nj 

r^   o    o   a 
U  tC  K  w 


■H  t^ 


Q  J  H 


288 


I 


1 

^^ 

\y 

1      / 

1 

289 


Si  ^    to":? 


290 


291 


j§ 


X) 

§1 


S     ^ 

4)     0) 

s^  2 


292 


293 


£ 

CO 

i) 

t 

't 

^ 

u 

■o 

1 

.2 

o 

X) 

^r^ 

•^ 

bO 

CQ 

0) 

J3 

K 

^ 

^  3  m 
O  5  ^ 
tC  c/2  ^ 


6^ 

Q  6 
(1) 

C    CO 
O   OT 

■S   o 


<;  o  K  J  ^  ^ 


>  > 


K  w 


U 

^ .  >       U  6  ^, 
■-'.    m   rt  Q  Z    B 


•>:  o  d  .S  .S  o 

<  2  «  ^  ^^ 


_  Z  U  2 

O      -  5'*  -J' 

Z   ^      .3 
SCO 

c   g   0)  S; 

5  Sm  >. 
CO  I;  "3 

■w    nl    «    O 
i£;  ^  2  « 


o"     . 

U   M 


Z^ 


O  O  K  ^ 


1 1 


S.2 

O  T3. 


294 


II 


"■  >  *  s  »■  2' 


Sh   ^    ii     3    ^    ^ 


U 

en 

t;  o 


«^ 


295 


296 


3^ 


O  ^       rt  o 


-^ 


.2  M  &  t:  "S  ^ 

o  d   lu   o   S  cfl 

CQ  W  J  Dh  OT  >" 


?i  2  ^.  I 
■g  -2  Id  6 

m    §  ^  15 

<  J  ^  >^ 


Ctf     0) 


M     O     g     g 

^  to  ;:3  S 


So    - 


(i;^ 


s  t 


I  I  I  I        ^-  ^ 

S  ■«    O    g.^  0    3 

DP  ft.  w  ^     m  m 


O    J      -g 


-  jj   o 

<U    1;;    rn 


OS 


297 


I 


\ 


298 


>o 


>  H 


•>    ci 


aJ  o  rt  ■- ' 
J=  C  O  Sh 
U  «  «  H 


2     •       ^   ^  - 

.  ^  h"    -  S    •> 

ij     ..Si    o  5  -a     . 

ra    <u  t!    3    o  •"    o 
<:  CQO  W  §  K  K 


^  J=   g 

O    M  .ii 

Sac 

O   ^    cil 
S   P.   ^ 


-  rt   S      " 


r:!  c  rt   3 


299 


^'  o  o 


CO 

CD 

o 

'> 

'C 

u 

1 

U 

73 

c 

o 

"V 

.ii 

M 

CO 

v 

X! 

K 

3 

OT 

I)     O     3    S 

•3  .S  o  S 

«  U  U  0, 


300 


301 


3^ 


en         tn  ^ 

c  ^  .i  ^  - 

5   (D  "^   (u  :::! 


cH-  5   tn  .2  "^^     . 


?» 


s| 


U    I 


^    "    ^    ^     C 


3     "     b     c     c     C 

"3  w  2  o  I'  £ 

Q  W  O  i  S  K 


QQot      oo      §o      uo 


3.1 


ol    CO 

01     (U 


■:5   c   o 
U  S  K 


o    -  S  ^ 


302 


d  -5  §  „: 


o  ^  o  -s 

M   "     O     g 


OW^§ 


2^     .§^ 


^  .2 


a§§« 


303 


304 


^^ 


IS 


^  ° 


<«-       § 


J  «       O  Q  J  w 


>^  o 
^  U 


O 


305 


EXHIBIT  D 


CITY  PAIRS  RISKING  CURTAILMENT  OF  SERVICE 
BY  STATE 


51-146    O  -  76  -  pt.  1  -  21 


306 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.  Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand, 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 

ALABAMA 

Between: 

Birmingham 

and: 

-  Chicago,   ni. 

6 

-  Cincinnati,   Ohio 

2 

-  Dallas /Ft.  Worth,   ' 

Tex. 

2 

-  Jackson/ Vicksburg, 

Miss 

9 

-  Los  Angeles,   Calif. 

3 

-  Memphis,   Tenn. 

9 

-  Miami,    Fla. 

3 

-  Mobile.  Ala. 

6 

-  New  Orleans,   La. 

7 

-  New  York.  N.Y. 

5 

HuntsvUle/ Decatur 

and: 

-  Greensboro,   N.C. 

-  Los  Angeles,   Calif. 

-  Knoxville,   Tenn. 

-  Orlando,   Fla. 

-  St.   Louis,   Mo. 

-  Washington.   D.C. 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


and: 

-  Atlanta.  Ga. 

-  Birmingham.   Ala. 


Montgomery 
and: 

-  Jackson/Vicksburg. 

-  New  Orleans,   La. 


307 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 
Non-stop 
Services 

(1973  Actual) 


Services  Assigned 

at 

Maximuni  Earnings 

(Simulation) 


Between: 
Phoenix 


and: 

-  Albuquerque.   N.  M. 

-  Amarillo,   Texas 

-  Chicago,    111. 

-  Dallas,   Texas 

-  Denver,   Colo. 

-  El  Paso,   Texas 

-  Houston,   Texas 

-  Kansas  City,   Mo. 

-  Las  Vegas,   Nev. 

-  Los  Angeles,    Calif. 

-  Minneapolis/St.    Paul, 

-  New  York,   N.  Y. 

-  Oklahoma  City.  Okla. 

-  Portland,   Ore. 

-  St.    Louis,   Mo. 

-  San  Antonio,   Texas 

-  San  Francisco,   Calif. 

-  Washington,   D.  C. 


and: 

-  Chicago,   m. 

-  Dallas.   Texas 

-  Los  Angeles.    Calif. 

-  San  Francisco,   Calif. 


308 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 
Services                Maximum  Earnings 

(1973  Actual)  (Simulation) 

ARKANSAS 
Between: 
Little  Rock 
and: 

-  Dallas,   Texas                                   14  4 

-  Houston.   Texas                                  2  2 

-  Kansas  City,   Mo.                                2  2 

-  Memphis,   Tenn.                                31  2 

-  Nashville,   Tenn.                                  2  2 

-  Oklahoma  City.  Okla.                      2  2 

-  St.    Louis,   Mo.                                     6  4 

-  Shreveport,   La.                                 4  2 


309 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 

CALIFORNIA 

Between: 

Los  Angeles 

and: 

-  Albuquerque.   N. M. 

12 

-  Atlanta.   Ga. 

13 

-  Baltimore,   Md. 

3 

-  Birmingham,   Ala. 

3 

-  Boston,   Mass. 

7 

-  Chicago,   111. 

42 

-  Cleveland,  Ohio 

9 

-  Colorado  Springs,    Colo. 

2 

-  Columbus,  Ohio 

2 

-  Dallas,   Texas 

26 

-  Denver,   Colo. 

26 

-  Des  Moines,    Iowa 

2 

-  Detroit,   Mich. 

10 

-  El  Paso.   Texas 

14 

-  Hartford,   Conn. 

4 

-  Houston,   Texas 

14 

-  Huntsville/ Decatur,   Ala, 

3 

-  Indianapolis,   Ind. 

2 

-  Kansas  City,   Mo. 

12 

-  Memphis,   Tenn. 

8 

-  Miami,    Fla. 

4 

-  Milwaukee,    Wis. 

4 

-  Minneapolis /St.    Paul,    M 

linn.       13 

-  Monterey,    Calif. 

11 

-  New  Orleans,   La. 

6 

-  New  York,   N.  Y. 

25 

-  Oklahoma  City,   Okla. 

8 

-  Omaha,   Neb. 

6 

-  Philadelphia,    Pa. 

10 

Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


310 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 


CALIFORNIA  (cont'd) 


Between: 

Los  Angeles  (cont'd) 

and: 

-  Phoenix.   Ariz. 

29 

-  Pittsburgh,   Pa. 

3 

-  Portland,  Ore. 

16 

-  Reno,   Nev. 

6 

-  Sacramento,   Calif. 

13 

-  St.   Louis,   Mo. 

11 

-  Salt  Lake  City,   Utah 

12 

-  San  Antonio,   Texas 

3 

-  San  Francisco,   Calif. 

80 

-  Seattle.  Wash. 

18 

-  Tampa,   Fla. 

1 

-  Tucson.  Ariz. 

10 

-  Washington,  D.C. 

11 

Monterey 

and: 

-  Los  Angeles.   Calif. 

11 

Sacramento 

and: 

-  Chicago,   111. 

4 

-  Denver,   Colo. 

4 

-  Los  Angeles.   Calif. 

13 

-  Portland,  Ore. 

2 

-  Salt  Lake  City,   Utah 

2 

San  Diego 

and: 

-  Chicago.   111. 

13 

-  Dallas,   Texas 

6 

-  Denver,   Colo. 

6 

-  New  York,   N.Y. 

3 

-  Seattle,   Wash. 

2 

-  Washington.   D.C. 

4 

San  Francisco 

and: 

-  Albuquerque,   N.M. 

12 

-  Atlanta,   Ga. 

7 

-  Baltimore.   Md. 

4 

311 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Page  3 


Average  Daily 

Services  Assigned 

Non-Stop 

at 

Services 

Maximum  Earnings 

(1973  Actual) 

(Simulation) 

CALIFORNIA  (cont'd) 

Between: 

San  Francisco  (cont'd) 

and: 

-  Boise.   Idaho 

4 

2 

-  Boston,   Mass. 

7 

4 

-  Chicago,   ni. 

29 

12 

-  Cleveland,  Ohio 

2 

2 

-  Dallas,    Texas 

18 

2 

-  Denver,   Colo. 

26 

6 

-  Detroit,   Mich. 

9 

2 

-  Eugene,  Ore. 

8 

2 

-  Houston,   Texas 

5 

2 

-  Kansas  City,    Mo. 

5 

2 

-  Las  Vegas,   Nev. 

31 

14 

-  Los  Angeles,   Calif. 

80 

48 

-  Medford,  Ore. 

6 

4 

-  Miami,   Fla. 

4 

2 

-  Minneapolis /St.   Paul, 

Minn.       11 

2 

-  New  Orleans,    La. 

2 

2 

-  New  York.   N.   Y. 

19 

2 

-  Oklahoma  City.   Okla. 

3 

2 

-  Omaha.   Neb. 

2 

2 

-  Philadelphia,   Pa. 

7 

2 

-  Phoenix.   Ariz. 

9 

6 

-  Pittsburgh.   Pa. 

2 

2 

-  Portland.   Ore. 

28 

10 

-  St.   Louis.   Mo. 

4 

2 

-  Salt  Lake  City.   Utah 

11 

2 

-  San  Antonio.   Texas 

3 

2 

-  Seattle.   Wash. 

31 

10 

-  Spokane,   Wash. 

4 

2 

-  Tucson,   Ariz. 

4 

2 

-  Washington,   D.   C. 

7 

2 

312 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Directions 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


COLORADO 
Between: 
Colorado  Springs 
and: 

-  Albuquerque,    N.  M. 

-  Chicago,   IlL 

-  Dallas,   Tex. 

-  Los  Angeles,    Calif. 


and: 

-  Albuquerque,   N.  M. 

15 

-  Baltimore,   Md. 

2 

-  Billings,   Mont. 

4 

-  Boise,   Idaho 

4 

-  Boston,   Mass. 

4 

-  Chicago,   111. 

16 

-  Cleveland,   Ohio 

2 

-  Dallas,   Tex. 

25 

-  Des  Moines,   Iowa 

6 

-  Detroit,    Mich. 

5 

-  Fresno,    Calif. 

2 

-  Houston,   Tex. 

9 

-  Kansas  City.   Mo. 

19 

-  Las  Vegas,    Nev. 

14 

-  Lincoln,    Neb. 

4 

-  Los  Angeles,   Calif. 

26 

-  Memphis,   Tenn. 

2 

-  Midland/Odessa,   Tex. 

2 

313 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Page  2 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


COLORADO  (cont'd) 
Between: 
Denver 
and: 

-  Milwaukee,  Wis.  6 

-  Minneapolis/St.    Paul,  Minn.  16 

-  Moline,   111.  2 

-  New  Orleans,   La.  1 

-  New  York,   N.  Y.  16 

-  Oklahoma  City,   Okla.  5 

-  Omaha,   Neb.  15 

-  Philadelphia,    Pa.  2 

-  Phoenix,   Ariz.  18 

-  Portland,  Ore.  14 

-  Rapid  City,   S.  D.  6 

-  Reno,   Nev.  4 

-  Sacramento,   Calif.  4 

-  Salt  Lake  City,   Utah  26 

-  San  Diego.   Calif.  6 

-  San  Francisco,   Calif.  26 

-  Seattle,   Wash.  13 

-  Sioiix  Falls.   S.  D.  4 

-  Spokane,   Wash.  3 

-  St.    Louis.   Mo.  14 

-  Tulsa.  Okla.  2 

-  Washington.   D.C.  9 

-  Wichita.   Kan.  10 


Grand  Junction 


Las  Vegas.   Nev. 


314 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 


CONNECTICUT 
Between: 
Hartford 
and: 

-  Atlanta,  Ga. 

-  Chicago,  111. 

-  Cleveland,  Ohio 

-  Detroit,   Mich. 

-  Ft.   Lauderdale,   Fla. 

-  Los  Angeles,   Calif. 

-  Miami,   Fla. 

-  Philadelphia,   Pa. 

-  Pittsburgh,   Pa. 

-  Washington,  D.  C. 


New  Haven 
and: 
-  Washington,   D.  C. 


315 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


DELAWARE 


316 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.  Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
mcLximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peEik  demand. 


Average  DaUy 

Non-stop 

Services 

(1973  Actual) 

DISTRICT  OF  COLUMBIA 

Between: 

Washington 

and: 

-  Atlanta.   Ga, 

30 

-  Austin.   Tex. 

2 

-  Boston.   Mass, 

44 

-  Buffalo.  N.Y. 

11 

-  Charleston.  S.C. 

4 

-  Charlotte.   N.  C. 

6 

-  Chicago,   m. 

52 

-  Cleveland.  Ohio 

19 

-  Cincinnati.   Ohio 

7 

-  Columbia.   S.C. 

2 

-  Columbus.  Ohio 

9 

-  Dallas.   Tex. 

14 

-  Dayton.   Ohio 

8 

-  Denver,  Colo. 

9 

-  Detroit,   Mich. 

17 

-  Greensboro/ High  Point, 

N.C.       6 

-  Greenville.   Spartanburg. 

S.C.     2 

-  Hartford.   Conn. 

14 

-  Houston.   Tex. 

4 

-  Huntsville/Decatur. 

Ala. 

2 

-  Indianapolis.   Ind. 

3 

-  Jacksonville.   Fla. 

5 

-  Kansas  City.   Mo. 

1 

-  KnoxvUle,   Tenn. 

7 

-  Lexington,  Ky. 

2 

-  Los  Angeles,   Calif. 

11 

-  Louisville.   Ky. 

6 

-  Memphis.   Tenn. 

8 

Services  Assigned 


Maximum  Ear 


nings 


(Simulation) 


317 

Page  2 
Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


:.-.                                                   Average  Daily 

Services  Assigned 

Non-Stop 

at 

Services 

Maximum  Earnings 

(1973  Actual) 

(Simulation) 

DISTRICT  OF  COLUMBIA  (cont'd) 

Between: 

Washington 

and: 

-  Miami,    Fla.                                         17 

4 

-  Milwaukee.   Wis.                                2 

2 

-  Minneapolis /St.    Paul.    Minn.       11 

2 

-  Nashville,   Tenn.                                8 

4 

-  New  Haven,   Conn.                              5 

2 

-  New  York,  N.  Y.                              128 

36 

-  Orlando.   Fla.                                      6 

4 

-  Phoenix,   Ariz.                                   4 

2 

-  Pittsburgh,   Pa.                                15 

6 

-  Providence.   R.I.                               11 

4 

-  Rochester,   N.Y.                                  8 

4 

-  St.    Louis,   Mo.                                   11 

4 

-  San  Diego,   Calif.                               4 

2 

-  San  Francisco,   Calif.                      7 

2 

-  Syracuse,   N.Y.                                  10 

2 

-  Tampa.   Fla.                                        6 

2 

-  Tulsa,  Okla.                                          2 

2 

-  West  Palm  Beach.   Fla,                   3 

2 

318 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

FLORIDA 
Between: 
Daytona  Beach 
and: 
-  Atlanta,    Ga,  9  * 


[iami,    Fla. 


6  2 


-  New  York,   N.Y.  1  2 

Ft.   Lauderdale 
and: 

-  Atlanta,   Ga.  23  6 

-  Baltimore,   Md.  4  2 

-  Boston,   Mass.  S  4 

-  Chicago,   111.  14  4 

-  Cleveland,   Ohio  6  4 

-  Detroit,   Mich. 

-  Hartford,   Conn. 

-  Jacksonville,   Fla.  4  2 

-  New  York,   N.Y.  44  14 

-  Philadelphia,    Pa. 


3  2 

3  2 


7  2 

5  4 

13  4 


-  Pittsburgh,    Pa. 

-  Tampa,    Fla. 

Gainesville 
and: 

-  Atlanta,   Ga.  4  2 

Jacksonville 
and: 

-  Atlanta.   Ga.  30  14 


Chicago,   111. 
Ft.   Lauderdale, 


4  2 

2 


319 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Page  2 


FLORIDA  (Cont'd.) 
Between 
Jacksonville  (Cont'd, 
and: 

-  Miami,    Fla. 

-  New  Orleans, 

-  New  York,   N. 

-  Norfolk,    Va. 

-  Philadelphia,    Pa. 

-  Washington,   D.C. 

-  West  Palm  Beach. 


La. 
Y. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


Services  Assigned 

at 
Maximum  Earnings 
(Simulation) 


Melbourne 


Atlanta,   Ga. 


Miami 

and: 

-  Atlanta,   Ga. 

34 

-  Baltimore,   Md, 

5 

-  Birmingham,   Ala. 

3 

-  Boston,   Mass. 

13 

-  Buffalo,   N.Y. 

2 

-  Charlotte,   N.C. 

4 

-  Chicago,   111. 

18 

-  Cincinnati,   Ohio 

4 

-  Cleveland,   Ohio 

5 

-  Columbus,   Ohio 

4 

-  Dallas,   Tex. 

11 

-  Daytona  Beach,   Fla. 

6 

-  Detroit,   Mich. 

7 

-  Hartford,   Conn. 

3 

-  Houston,   Tex. 

7 

-  Jacksonville,    Fla. 

8 

-  Los  Angeles,   Calif. 

4 

-  New  Orleans,   La. 

8 

-  New  York,   N.Y. 

66 

-  Philadelphia,    Pa. 

14 

-  Pittsburgh,    Pa. 

10 

-Raleigh/Durham,   N.C. 

2 

-  St.   Louis,   Mo. 

5 

-  San  Francisco,   Calif. 

4 

-  Tampa,   Fla. 

34 

-  Washington,   D.C. 

17 

320 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd. 


Page  3 


FLORIDA  (Cont'd. ) 
Between: 
Orlando 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


Services  Assigned 

at 
Maximum  Earnings 
(Simulation) 


-  Atlanta,   Ga. 

26 

-  Boston,   Mass. 

3 

-  Charlotte,   N.C. 

2 

-  Chicago,   111. 

7 

-  Cleveland,   Ohio 

2 

-  Cincinnati,   Ohio 

2 

-  Dallas,   Tex. 

2 

-  Detroit,   Mich. 

3 

-  Huntsville/Decatur,   Ala 

2 

-  New  York,   N.  Y. 

17 

-  Philadelphia,    Pa. 

2 

-  Washington,   D.C. 

6 

Panama  City 

and: 

-  Tampa,    Fla. 

3 

Pensacola 

and: 

-  Atlanta,   Ga. 

12 

Sarasota 

and: 

-  Atlanta,   Ga. 

7 

-  Chicago,  111. 

2 

Tallahassee 

and: 

-  Atlanta,   Ga. 

10 

Tampa 

and: 

-  Atlanta,   Ga. 

37 

-  Boston,   Mass. 

6 

-  Chicago,   111. 

16 

-  Cincinnati,   Ohio 

4 

-  Cleveland,   Ohio 

5 

-  Columbus,   Ohio 

2 

-  Dallas,    Tex. 

7 

321 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Page  4 


(1973  Actual) 

FLORIDA  (cont'd) 

Between: 

Tampa  (cont'd) 

and: 

-  Dayton,  Ohio 

2 

-  Detroit,   Mich. 

9 

-  Ft.   Lauderdale,    Fla. 

13 

-  Houston,   Tex. 

1 

-  Los  Angeles.    Calif. 

1 

-  Louisville,  Ky. 

2 

-  Miami.    Fla. 

34 

-  Milwaukee,    Wis. 

2 

-  Nashville.   Tenn. 

2 

-  New  Orleans,   La. 

9 

-  New  York,   N.  Y. 

20 

-  Panama  City,    Fla. 

3 

-  Philadelphia,    Pa. 

8 

-  Pittsburgh,    Pa. 

6 

-  St.   Louis.    Mo. 

5 

-  Washington.    D.  C. 

6 

West  Palm  Beach 

and: 

-  Atlanta,   Ga. 

17 

-  Chicago,   m. 

2 

-  Jacksonville,    Fla. 

5 

-  New  York,   N.Y. 

9 

-  Washington,   D.  C. 

3 

Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(Simulation) 


322 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


Between: 
Atlanta 


and: 

-  Akron/Canton,  Ohio  2 

-  Baltimore,   Md.  18 

-  Baton  Rouge,   La.  3 

-  Boston,   Mass.  H 

-  Buffalo,   N.Y.  9 

-  Charleston,   S.C.  6 

-  Charleston,   W.   Va.  3 

-  Charlotte,    N.C.  25 

-  Chicago,   111.  34 

-  Columbus,   Ohio  5 

-  Cincinnati,   Ohio  14 

-  Cleveland,   Ohio  12 

-  Dallas/Ft.  Worth,   Tex.  31 

-  Dayton,   Ohio  11 

-  Daytona  Beach,   Fla.  9 

-  Detroit,  Mich.  10 

-  Evansville,   Ind.  2 

-  Ft.   Lauderdale,   Fla.  23 

-  Gainesville,    Fla.  * 

-  Greensboro/High  Point,   N.C.    12 

-  Hartford,   Conn.  8 

-  Houston,   Tex.  26 

-  Indianapolis,    Ind.  13 

-  Jackson/Vicksburg,  Miss.  8 

-  Jacksonville,   Fla.  30 


323 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Page  2 


GEORGIA  (cont'd.) 


Average  Daily 

Non-stop 

Services 

(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


Between: 

Atlanta  (cont'd.  ) 

and: 

-  Kansas  City,   Mo. 

6 

-  Las  Vegas.   Nev. 

2 

-  Lexington,    Ky. 

2 

-  Louisville,    Ky. 

23 

-  Los  Angeles,   Calif. 

13 

-  Melbourne,   Fla. 

7 

-  Memphis,   Tenn. 

18 

-  Miami,    Fla. 

34 

-  Milwaukee,   Wis. 

6 

-  Minneapolis/St.    Paul,   Minn. 

10 

-  Mobile,   Ala. 

12 

-  Nashville,    Tenn. 

14 

-  New  Orleans,    La. 

29 

-  Newport  News,   Va. 

2 

-  New  York,    N.  Y. 

57 

-  Norfolk,    Va. 

5 

-  Orlando,   Fla. 

26 

-  Pensacola,   Fla. 

12 

-  Philadelphia,    Pa. 

25 

-  Pittsburgh,   Pa. 

15 

-  Providence,   R.L 

2 

-Raleigh/Durham,    N.C. 

12 

-  Richmond,   Va. 

8 

-  Rochester,   N.Y. 

3 

-  San  Antonio,   Tex. 

7 

-  San  Francisco,   Calif. 

7 

-  St.   Louis,   Mo, 

18 

-  Sarasota,   Fla. 

7 

-  Savannah,    Ga. 

13 

-  Shreveport,   La. 

2 

-  Syracuse,    N.  Y. 

4 

-  Tallahassee,    Fla. 

10 

-  Tampa,   Fla. 

37 

-  Washington,   D.C. 

30 

-  West  Palm  Beach,   Fla. 

17^ 

Savannah 

Atlanta,    Ga. 


324 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simiilated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services 
(1973  Actual) 


Maximum  Earnings 
(Simulation) 


Between: 

Boise 

and: 

-  Chicago,   111. 

-  Denver,   Colo. 

-  Portland.   Ore. 

-  Reno,   Nev. 

-  San  Francisco, 

-  Seattle.  Wash. 


325 

COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


Between: 

Chicago 

and: 

-  Akron/Canton,   Ohio 

7 

-  Albany,    N.Y. 

6 

-Albuquerque,    N.Mex. 

9 

-  AUentown,   Pa. 

3 

-  Atlanta,   Ga. 

34 

-  Baltimore,   Md. 

14 

-  Billings,   Mont. 

2 

-  Birmingham,  Ala. 

6 

-  Boise.   Idaho 

2 

-  Boston,  Mass. 

29 

-  Buffalo,   N.Y. 

15 

-  Charlotte.   N.C. 

7 

-  Cleveland,   Ohio 

34 

-  Colorado  Springs,   Colo. 

3 

-  Columbia,    S.   C. 

2 

-  Columbus,   Ohio 

15 

-  Dallas,   Tex. 

25 

-  Denver,   Colo. 

41 

-  Des  Moines,   Iowa 

19 

-  El  Paso,   Tex. 

3 

-  Evansville,   Ind. 

6 

-  Ft.   Lauderdale,    Fla. 

14 

-  Greensboro/High 

Point,   N.C. 

8 

-  Harrisburg,   Pa. 

2 

-  Hartford,  Conn. 

18 

326 


Page  2 
Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Average  Daily 
Non-stop 
Services 

Services  Assigned 

at 
Maximum  Earnings 

(1973  Actual) 

(Simulation) 

ILLINOIS  (cont'd.) 

Between; 

Chicago  (cont'd.  ) 

and: 
-  Houston,   Tex. 

14 

4 

-  Islip,    N.Y. 

-  Jacksonville,   Fla. 

2 
4 

2 
2 

-  Kansas  City,  Mo. 

41 

12 

-  Knoxville,    Tenn. 

2 

2 

-  Las  Vegas,    Nev. 

19 

8 

-  Lincoln,    Nebr. 

-  Los  Angeles,   Calif. 

-  Louisville,   Ky. 

4 
42 
16 

2 

16 

8 

-  Memphis,    Tenn. 

-  Miami,   Fla. 

-  Minneapolis/St.   Paul, 

-  Nashville,   Tenn. 

19 

18 

Minn.       56 

12 

6 

6 

32 

-  New  Orleans,    La, 

8 

-  Newport  News,    Va. 

-  New  York,   N.Y. 

2 
117 

36 

-  Norfolk,   Va. 

7 

-  Oklahoma  City,   Okla. 

-  Omaha,   Nebr. 

7 
19 

10 

-  Orlando.   Fla. 

7 

-  Phoenix,   Ariz. 

18 

-  Pittsburgh,    Pa. 

-  Portland,   Oreg. 

-  Providence,   R.    I. 
-Raleigh/Durham,    N.C 

-  Reno,    Nev. 

44 

11 

4 

6 

2 

10 

-  Rochester,   Minn. 

12 

-  Rochester,   N.Y. 

12 

-  Sacramento,   Calif, 

-  Salt  Lake  City,   Utah 

-  San  Antonio,   Tex. 

-  San  Diego,   Calif. 

-  San  Francisco,   Calif. 

4 
15 

7 
13 
29 

12 

-  Sarasota,   Fla. 

-  Seattle,   Wash. 

15 

2 
6 

-  Spokane,    Wash. 

-  Syracuse,    N.Y. 

-  Tampa,   Fla. 

2 

6 

16 

2 
4 
6 

327 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Page  3 


ILLINOIS  (cont'd.) 
Between: 
Chicago  (cont'd.  ) 
and: 

-  Tucson,   Ariz. 

-  Tulsa,   Okla. 

-  Washington,   D.C. 

-  West  Palm  Beach,   Fla. 

-  Wichita,    Kan. 

-  Youngstown,   Ohio 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


Services  Assigned 


Maxi 


mm  Earnings 


(Simulation) 


Moli 


Denver,   Colo. 


328 

COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximizatio 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Between: 

Evansville 

and: 

-  Atlanta,    Ga. 

2 

-  Chicago,   111. 

6 

Indianapolis 

and: 

-  Atlanta,   Ga. 

13 

-  Dallas,    Tex. 

5 

-  Kansas  City,   Mo. 

4 

-  Los  Angeles,   Calif. 

2 

-  Memphis,    Tenn. 

7 

-  Minneapolis/St.   Paul,   Minn.         2 

-  New  York,   N.Y. 

8 

-  Philadelphia.   Pa. 

2 

-  Pittsburgh,    Pa. 

5 

-  Washington,   D.  C. 

3 

Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


329 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

IOWA 
Between: 
Cedar  Rapids 
and: 
-  Chicago,    111.  11  6 

Des  Moines 


Chicago,   111. 

Denver,   Colo. 

Los  Angeles,   Calif. 


330 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE;       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


Between: 

Wichita 

and: 

-  Albuquerque,   N.  M.  2  2 

-  Chicago,   111.  6  2 

-  Denver,   Colo.  10  4 


331 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 
Services                Maximum  Earnings 

(1973  Actual)  (Simulation) 

KENTUCKY 
Between: 
Lexington 
and: 

-  New  York,   N.Y.                                  2  2 

-  Washington,  B.C.                              2  2 

Louisville 
and: 

-  Atlanta,    Ga.                                         23  6 

-  Chicago,    111.                                        16  8 

-  Cleveland,   Ohio                                 4  2 

-  Columbus,   Ohio                                   4  2 

-  Dallas,   Tex.                                          3  2 

-  Detroit,   Mich.                                      7  4 

-  Kansas  City,   Mo.                                2  2 

-  Knoxville,   Tenn.                                  4  2 

-  Memphis,   Tenn.                                  4  2 

-  New  York,   N.Y.                                   5  .4 

-  St.   Louis,   Mo.                                      5  2 

-  Tampa,    Fla.                                          2  2 
-Washington,   B.C.                                6  2 


332 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
liiaximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 


LOUISIANA 
Between: 
Alexandria 


(1973  Actual) 


(Simulation) 


Dallas,   Texas 


New  Orleans 

and: 
-  Atlanta,   Ga. 

29 

-  Baltimore,   Md. 

4 

-  Birmingham,   Ala. 

-  Boston,    Mass. 

7 
2 

-  Chicago,    111. 

-  Dallas,   Texas 

8 

24 

-  Denver,   Colo. 

1 

-  Houston,   Texas 

36 

-  Jacksonville,    Fla. 

2 

-  Kansas  City,   Mo. 

-  Los  Angeles,   Calif. 

2 
6 

-  Memphis,   Tenn. 

15 

-  Miami,    Fla. 

-  Montgomery,    Ala. 

-  Nashville.   Tenn. 

-  New  York,   N.Y. 

8 
4 
2 
12 

-  Philadelphia,    Pa. 

-  Pittsburgh,    Pa. 

-  St.   Louis,    Mo. 

3 
4 
4 

-  San  Antonio,   Texas 

3 

-  San  Francisco,   Calif. 

2 

-  Shreveport,    La. 

-  Tampa,    Fla. 

8 

9 

333 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Page  2 


Average  Daily 
Non-stop 
Services 


LOUISIANA  (cont'd) 
Between: 
Shreveport 
and: 

-  Atlanta,  Ga. 

-  Dallas,   Texas 

-  Houston,   Texas 

-  Jackson/Vicksburg,   Miss 

-  Little  Rock,   Ark. 

-  Memphis.   Tenn. 

-  New  Orleans,   La. 


(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


334 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maiximum  Earnings 


(1973  Actual) 


(Simulation) 


Between: 
Bangor 
and: 
-  Boston.   Mass. 

Portland 


New  York,  N.  Y. 


Presque  Isle 
and: 
-  Boston,   Mass. 


335 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Directions 


NOTE:         This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 

MARYLAND 

Between: 

Baltimore 

and: 

-  Atlanta.   Ga. 

18 

-  Boston,    Mass. 

16 

-  Chicago,   111 

14 

-  Cleveland,  Ohio 

4 

-  Dallas,   Texas 

5 

-  Denver.   Colo, 

2 

-  Detroit,   Mich. 

4 

-  Ft.    Lauderdale.    Fla. 

4 

-  Houston.   Texas 

2 

-  Kansas  City.   Mo. 

2 

-  Los  Angeles.   Calif. 

3 

-  Miami.    Fla. 

5 

-  New  Orleans,  La. 

4. 

-  Pittsburgh,    Pa. 

12 

-  St.   Louis,   Mo. 

2 

-  San  Francisco,   Calif. 

4 

Services  Assigned 


Maximum  Earnings 
(Simulation) 


336 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:         This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 
MASSACHUSETTS 


Between: 

Boston 

and: 

-  Atlanta,   Ga. 

11 

-  Baltimore,   Md. 

16 

-  Bangor,   Maine 

9 

-  Buffalo.   N.Y. 

8 

-  Charlotte.   N.C. 

2 

-  Chicago,   Ul. 

29 

-  Cleveland.  Ohio 

10 

-  Cincinnati,   Ohio 

5 

-  Columbus.  Ohio 

3 

-  Dallas.   Texas 

2 

-  Denver.   Colo. 

4 

-  Detroit.   Mich. 

8 

-  Ft.    Lauderdale.    Fla. 

6 

-  Los  Angeles.    Calif. 

7 

-  Miami,    Fla. 

13 

-  Milwaukee.    Wis. 

2 

-  Minneapolis/St.    Paul,    Minn.         4 

-  New  Orleans,   La. 

2 

-  New  York.   N.Y. 

121 

-  Orlando,    Fla. 

3 

-  Philadelphia.   Pa. 

42 

-  Pittsburgh.    Pa. 

11 

-  Presque  Isle.   Me, 

4 

-  St.    Louis,   Mo. 

4 

-  San  Francisco.   Calif. 

7 

-  Tampa.    Fla. 

6 

-  Washington.    D.  C. 

44 

337 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -   Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  fr-equcncies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


Between: 

Detroit 
and: 

-  Albany.   N.Y. 

-  Atlanta,   Ga. 

4 
10 

-  Baltimore,   Md. 

4 

-  Boston,    Mass. 

8 

-  Buffalo,   N.Y. 

11 

-  Burlington,    Vt. 

2 

-  Cincinnati,   Ohio 

-  Dallas.   Texas 

-  Denver,   Colo. 

14 
7 

5 

-  Ft.   Lauderdale,    Fla. 

-  Hartford,   Conn. 

3 
6 

-  Kansas  City,   Mo. 

-  Las  Vegas,   Nev. 

4 
2 

-  Los  Angeles,   Calif. 

-  Louisville,   Ky. 

10 
7 

-  Memphis,   Tenn. 

-  Miami.    Ha. 

-  Minneapolis/St.   Paul.    Mii 

-  New  York.   N.  Y. 

3 

7 

m.         5 

56 

-  Orlando.    Fla. 

3 

-  Philadelphia,    Pa. 

-  Pittsburgh,    Pa. 

14 
14 

-  Rochester,    N.Y. 

-  St.    Louis,    Mo. 

12 

6 

-  San  Francisco,   Calif. 

9 

-  Syracuse,   N.  Y. 

2 

-  Tampa.    Fla. 

-  Washington,   D.  C. 

9 
17 

51-146  O  -  76  -  Dt. 


338 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


MICHIGAN  (cont  'd ) 
Between: 
Saginaw 
and: 
-  New  York,    N.  Y. 


Page 


339 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE;       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 

MINNESOTA 

Between: 

Minneapolis/St.   Paul 

and; 

-  Atlanta,   Ga. 

10 

-  Billings,   Mont. 

2 

-  Bismarck,   N.   Dak. 

2 

-  Boston,  Mass. 

4 

-  Chicago,   111. 

56 

-  Cleveland,   Ohio 

4 

-  Dallas.   Tex. 

4 

-  Denver,   Colo. 

16 

-  Detroit,   Mich. 

5 

-  Indianapolis,   Ind. 

2 

-  Kansas  City,   Mo. 

6 

-  Las  Vegas,    Nev. 

3 

-  Los  Angeles,  Calif. 

13 

-  Milwaukee,   Wis. 

12 

-  New  York,   N.Y. 

16 

-  Omaha,    Nebr. 

13 

-  Philadelphia,   Pa. 

4 

-  Phoenix,   Ariz. 

2 

-  Rapid  City,    S.   Dak. 

2 

-  San  Francisco,   Calif. 

11 

-  Seattle.   Wash. 

8 

-  Spokane,   Wash. 

4 

-  St.   Louis,   Mo. 

6 

-  Washington,   D.C. 

n 

Rochester 

and: 

. 

-  Chicago.   111. 

12 

340 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE;       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 

MISSISSIPPI 
Between: 
Jackson/ Vicks burg 
and: 

-  Atlanta,   Ga.  8  4 

-  Birmingham,   Ala.  9  4 

-  Dallas,   Tex.  3  2 

-  Memphis,    Tenn,  16  4 

-  Montgomery,   Ala.  5  2 

-  Shreveport,   La.  12  4 


341 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:        This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Avera 

ge  Daily 

Non 

i-Stop 

Ser 

vices 

MISSOURI 

(1973 

Actual) 

Between: 

Kansas  City 

and: 

-  Albuquerque,   N.M. 

4 

-  Amarillo,   Tex. 

2 

-  Atlanta,   Ga. 

6 

-  Baltimore,   Md. 

2 

-  Chicago,    111. 

41 

-  Cincinnati,   Ohio 

2 

-  Dallas,   Tex. 

18 

-  Denver,   Colo. 

19 

-  Detroit,   Mich. 

4 

-  Indianapolis,   Ind. 

4 

-  Las  Vegas,    Nev. 

2 

-  Little  Rock,   Ark. 

2 

-  Los  Angeles,   Calif. 

12 

-  Louisville,    Ky. 

2 

-  Memphis,   Tenn. 

8 

-  Minneapolis /St.   Paul, 

Minn. 

6 

-  New  Orleans,   La. 

2 

-  New  York,   N.Y. 

4 

-  Philadelphia,   Pa. 

2 

-  Phoenix,   Ariz. 

3 

-  San  Francisco,   Calif. 

5 

-  Seattle,   Wash. 

2 

-  Washington,   D.C. 

1 

Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


342 


Page  2 


Comparison 


of  Non-stop  Scheduled  Services  (cont'd.) 


Average  Daily 
Non-stop 
Services 


(1973  Actual) 


MISSOURI  (cont'd.) 
Between: 
St.   Louis 
and: 

-  Atlanta,   Ga. 

-  Baltimore,  Md. 

-  Boston,   Mass. 

-  Charlotte,   N.C. 

-  Cleveland,   Ohio 

-  Cincinnati,   Ohio 

-  Dallas,   Tex. 

-  Dayton,   Ohio 

-  Denver,   Colo. 

-  Detroit,   Mich. 

-  Houston,   Tex. 

-  Huntsville/Decatur,   Ala. 

-  Las  Vegas,   Nev. 

-  Little  Rock,   Ark. 

-  Louisville,   Ky. 

-  Los  Angeles,   Calif. 

-  Memphis.  Tenn. 

-  Miami,   Fla. 

-  Minneapolis/St.   Paul,   Mi 

-  New  Orleans,   La. 

-  New  York,   N.Y. 

-  Oklahoma  City,  Okla. 

-  Omaha,   Nebr. 

-  Philadelphia,   Pa. 

-  Phoenix,   Ariz. 

-  Pittsburgh,    Pa. 

-  San  Francisco,   Calif. 

-  Seattle,  Wash. 

-  Tulsa,   Okla. 

-  Tampa,   Fla. 

-  Washington,  D.C. 


2 
4 
2 

9 
10 
14 
10 
14 
6 
8 
2 
3 
6 
5 
11 
26 
5 
6 
4 
18 
2 
9 
5 
7 
8 
4 
3 
11 
5 
11 


Services 

at 

Maximum 


Assigned 
Earnings 


(Simulation) 


343 

COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


Between; 

Billings 

and: 

-  Chicago,    111.  2  2 

-  Denver,   Colo.  4  2 

-  Minneapolis /St.   Paul,   Minn.         2  2 

Great  Falls 
and: 

-  Salt  Lake  City,   Utah  2  2 


344 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 

1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

NEBRASKA 
Between: 
Lincoln 
and: 

-  Chicago,    111.  4  2 

-  Denver,   Colo.  4  2 

Omaha 
and: 

-  Chicago,    111.  19  10 

-  Denver,   Colo.  15  2 

-  Los  Angeles,   Calif.  6  2 

-  Minneapolis/St.   Paul,   Minn.       13  6 

-  San  Francisco,   Calif.  2  2 

-  Seattle,   Wash.  3  2 

-  St.   Louis,   Mo.  9  4 


345 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 


Flights  Per  Day  -  B 


oth  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


Services  Assigned 


Maximum  Earnings 
(Simulation) 


Between: 
Las  Vegas 
and: 


-  Albuquerque,    N.M. 

5 

-  Atlanta,   Ga. 

2 

-  Chicago,    111. 

19 

-  Dallas,   Tex. 

6 

-  Denver,   Colo. 

14 

-  Detroit,   Mich. 

2 

-  Grand  Junction,  Colo. 

2 

-  Houston,   Tex. 

6 

-  Kansas  City,  Mo. 

2 

-  Milwaukee,   Wis. 

1 

-  Minneapolis /St.   Paul,   Minn.         3 

-  New  York,   N.Y. 

7 

-  Phoenix,   Ariz. 

.  14 

-  St.   Louis,   Mo. 

2 

-  Salt  Lake  City,   Utah 

17 

-  San  Francisco,   Calif. 

31 

:eno 

and; 

-  Boise,   Idaho 

2 

-  Chicago,    111. 

2 

-  Denver,   Colo. 

4 

-  Los  Angeles,   Calif. 

6 

-  Portland,   Oreg. 

6 

-  Salt  Lake  City,   Utah 

7 

-  Seattle,   Wash. 

2 

346 

COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and.it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


NEW  HAMPSHIRE 
Between: 
Manchester 
and: 
Cleveland,   Ohio 


Average  Daily  Services  Assigned 

Non-  Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


347 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
,  adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 
NEW  JERSEY 

None. 


348 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

NEW  MEXICO 
Between: 
Albuquerque 
and: 

-  Chicago.    111.  9  4 

-  Colorado  Springs,    Colo.  5  2 


Dallas,   Tex.  n 

-  Denver,   Colo.  15 

-  Kansas  City,   Mo.  4 

-  Las  Vegas,    Nev.  5 

-  Los  Angeles,   Calif.  12 

-  Lubbock,    Tex.  2 

-  Midland,   Tex.  3 


Oklahoma  City,   Okla.  2  2 

Phoenix,   Ariz.  4  2 

San  Antonio,   Tex.  2  2 

San  Francisco,   Calif.  5  4 

Wichita,  Kan.  2  2 


349 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 


Non-Stop 

at 

Services 

Maximum  Earnings 

(1973  Actual) 

(Simulation) 

NEW  YORK 

Between: 

Albany 

and: 

-  Boston,   Mass. 

9 

2 

-  Buffalo,   N.Y. 

11 

2 

-  Chicago,   ni. 

6 

2 

-  Detroit,   Mich. 

4 

2 

Buffalo 

and: 

-  Chicago.   111. 

15 

6 

-  Cleveland,  Ohio 

13 

4 

-  Detroit,    Mich. 

11 

2 

-  Miami.    Fla, 

2 

2 

-  New  York.   N.Y. 

29 

10 

-  Philadelphia,   Pa. 

4 

2 

-  Pittsburgh,    Pa. 

17 

6 

-  Washington,    D.C. 

11 

2 

Islip 

and: 

-  Chicago,    ni. 

2 

2 

New  York 

and 

-  Atlanta.   Ga. 

57 

14 

-  Birmingham,   Ala. 

5 

2 

-  Boston,    Mass. 

121 

60 

-  Buffalo.   N.Y. 

29 

10 

-  Charleston,   S.  C. 

2 

2 

350 


r>^^p..i..on  of  Non-stop  Scheduled  Services  (cont'd) 


Page  2 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


NEW  YORK  (cont'd) 
Between: 
New  York  (cont'd) 
and: 

-  Charleston,   W.  Va. 

-  Charlotte,   N.C. 

-  Chicago,   111. 

-  Cincinnati,  Ohio 

-  Cleveland,  Ohio 

-  Columbia,   S.  C. 

-  Columbus,  Ohio 

-  Dallas,   Texas 

-  Dayton,  Ohio 

-  Daytona  Beach,    Fla. 

-  Denver,   Colo. 

-  Detroit,    Mich. 

-  Ft.   Lauderdale,    Fla. 

-  Greensboro,   N.C. 
-Greenville/Spartanburg.   S.C, 

-  Houston.   Texas 

-  Indianapolis,   Ind, 

-  Jacksonville,   Fla. 

-  Kansas  City.   Mo. 

-  Knoxville,    Tenn. 

-  Las  Vegas,   Nev. 

-  Lexington,  Ky. 

-  Los  Angeles,   Calif. 

-  Louisville,   Ky. 

-  Memphis,   Tenn. 

-  Miami,   Fla. 

-  Milwaukee,   Wis. 

-  Minneapolis /St.    Pool,    Minn. 

-  Nashville,   Tenn. 

-  Norfolk.   Va. 

-  New  Orleans,   La. 

-  Newport  News,   Va. 

-  Oklahoma  City,  Okla. 

-  Orlando.   Fla. 

-  Phoenix,   Ariz. 

-  Pittsburgh,   Pa. 

-  Portland,   Maine 

-  Raleigh/ Durham,  N.C. 


2 
18 
117 
15 
43 
6 
14 
25 
11 
1 
16 
56 
44 
13 
.   6 
5 
8 
2 
4 
5 
7 
2 
25 


16 

16 

6 

14 

12 

3 

2 

17 


2 
4 
36 
4 
12 
2 
4 
8 
4 
2 
4 
12 
14 
2 
2 
4 
4 
4 
2 
2 
4 
2 

12 
4 
4 
20 
6 
4 


351 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Page  3 


NEW  YORK  (cont'd) 
Between: 
New  York  (cont'd) 
and: 

-  Richmond.    Va. 

-  Rochester,   N.  Y. 

-  Saginaw,    Mich. 

-  Salt  Lake  City,   Utah 

-  St.   Louis,    Mo. 

-  San  Diego,   Calif. 

-  San  Francisco,   Calif. 

-  Seattle.   Wash. 

-  Syracuse,   N,  Y. 

-  Tampa,   Fla. 

-  Toledo,   Ohio 

-  Washington,    D.  C. 

-  West  Palm  Beach,    Fla. 

-  Youngstown,   Ohio 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


Rochester 
and: 

-  Atlanta.   Ga. 

-  Chicago,   ni. 

-  Cleveland,  Ohio 

-  Detroit.   Mich. 

-  New  York,   N.  Y. 

-  Philadelphia.   Pa. 

-  Pittsburgh.    Pa. 

-  Washington.   D.  C. 

Syracuse 
and: 

-  Atlanta.   Ga. 

-  Chicago,   111. 

-  Detroit,   Mich. 

-  New  York.   N.  Y. 

-  Philadelphia,    Pa. 

-  Washington,    D.C. 


352 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 

This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


NORTH  CAROLINA 


Between 

Charlotte 

and: 

-  Akron/Canton,   Ohio 

2 

-  Atlanta,   Ga. 

25 

-  Boston,   Mass. 

2 

-  Chattanooga,    Tenn. 

6 

-  Chicago,   111. 

7 

-  Columbus,   Ohio 

4 

-  Memphis,   Tenn. 

4 

-  Miami,   Fla. 

4 

-  New  York,   N.Y. 

18 

-  Orlando,   Fla. 

2 

-  Philadelphia,    Pa. 

6 

-  Pittsburgh.    Pa. 

8 

-  St.   Louis,    Mo. 

2 

-  Washington,   D.C. 

6 

Greensboro 

and: 

-  Atlanta,    Ga. 

12 

-  Chicago,   111. 

8 

-  Huntsville/Decatur,   Ala. 

2 

-  New  York,   N.Y. 

13 

-  Pittsburgh,    Pa. 

2 

-  Washington,   D.C. 

6 

353 


Page  2 

Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Average  Daily  Services  Assigned 

Non-Stop 

Services  Maximum  Earnings 

TT973  Actual)  (Simulation) 

NORTH  CAROLINA  (Cont'd.) 
Between: 
Raleigh/Durham 


and: 

-  Atlanta,    Ga.  12 


6  4 


Chicago,  HI 
Miami,  Fla. 
New  York,  I 
Philadelphia,    Pa.  2  2 


Miami,    Fla.  2  2 

New  York,   N.  Y.  12  4 


354 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 

NORTH  DAKOTA 


Between; 
Bismarck 


and: 
-  Minneapolis/St.   Paul, 


355 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:        This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Ear 


(1973  Actual) 

OHIO 

Between 

Akron/Canton 

and: 

-  Atlanta,    Ga. 

2 

-  Charlotte,    N.C. 

2 

-  Chicago.    111. 

7 

Cleveland 

and: 

-  Atlanta,   Ga. 

12 

-  Baltimore,    Md. 

4 

-  Boston,   Mass. 

10 

-  Chicago,   111. 

34 

-  Dallas,    Tex. 

5 

-  Denver,   Colo. 

2 

-  Ft.   Lauderdale,    Fla. 

6 

-  Hartford,   Conn. 

4 

-  Houston,   Tex. 

2 

-  Los  Angeles,   Calif. 

9 

-  Louisville,    Ky. 

4 

-  Manchester,    N.H. 

2 

-  Miami,    Fla. 

5 

-  Milwaukee,    Wis. 

6 

-  Minneapolis/St.   Paul, 

Minn. 

4 

-  New  York,   N.  Y. 

43 

-  Norfolk,   Va. 

2 

-  Orlando,   Fla. 

2 

-  Philadelphia,    Pa. 

15 

-  Providence,   R.  I. 

2 

-  Rochester,   N.Y. 

4 

(Si 


ition) 


ungs 


356 


Page  2 
Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


Average  Daily  Services  Assigned 

Non-stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

OHIO  (Cont'd.) 
Between: 
Celveland  (cont'd.) 
and: 

-  San  Francisco,   Calif.  2  2 

-  St.   Louis,   Mo.  9  4 

-  Tampa,    Fla.  5  2 

-  Washington,   D,C.  19  2 


and: 

-  Atlanta,  Ga. 

14 

-  Birmingham,  Ala. 

2 

-  Boston,   Mass. 

5 

-  Dallas,    Tex. 

7 

-  Detroit,    Mich. 

14 

-  Kansas  City,    Mo. 

2 

-  Knoxville,   Tenn. 

5 

-  Memphis,    Tenn. 

3 

-  Miami,   Fla. 

4 

-  Nashville,   Tenn. 

7 

-  New  York,   N.Y. 

15 

-  Orlando,    Fla. 

2 

-  Philadelphia,   Pa. 

2 

-  Pittsburgh,   Pa. 

9 

-  St.   Louis,   Mo. 

10 

-  Tampa,   Fla. 

4 

-  Washington,   D.C. 

7 

Columbus 

and: 

-  Atlanta,   Ga. 

5 

-  Boston.  Mass. 

3 

-  Charlotte,   N.C. 

4 

-  Chicago,   111. 

15 

-  Los  Angeles,   Calif. 

2 

-  Louisville,    Ky. 

4 

-  Miami,    Fla. 

4 

-  New  York,    N.Y. 

14 

-  Philadelphia,    Pa. 

5 

-  Tampa,    Fla. 

2 

-  Washington,   D.C. 

9 

357 


Page  3 

Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 


OHIO  (Cont'd.) 
Between: 
Dayton 
and: 
-  Atlanta,    Ga.  11 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 


-  Memphis,    Tenn.  2  2 

-  New  York,    N.  Y.  11  4 

-  St.   Louis,   Mo.  10  2 

-  Tampa,   Fla,  2  2 

-  Washington,   D.C.  8  4 

Toledo 
and: 

-  New  York,   N.  Y,  2  2 

Youngstown 
and: 

-  Chicago,   111.  5  2 

-  New  York.   N.  Y.  2  2 


358 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE;       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Services  Assigned 

Non-stop 

at 

Services 

Maximi 
(Sir 

jm  Earnings 

(1973  Actual) 

nulation) 

OKLAHOMA 

Between: 

Oklahoma  City 

and: 

-  Albuquerque,   N.M. 

2 

2 

-  Chicago,   111. 

7 

4 

-  Dallas,   Tex, 

26 

4 

-  Houston,   Tex. 

3 

2 

-  Little  Rock,  Ark. 

2 

2 

-  Los  Angeles,  Calif. 

8 

4 

-  New  York.   N.Y. 

2 

2 

-  Phoenix,   Ariz. 

4 

2 

-  St.   Louis,' Mo. 

2 

2 

-  San  Francisco,   Calif. 

3 

2 

Tulsa 

and: 

-  Chicago,   111. 

7 

4 

-  Denver,   Colo. 

2 

2 

-  Houston,   Tex. 

5 

4 

-  Nashville,  Tenn. 

2 

2 

-  St.   Louis.  Mo. 

11 

4 

-  Washington,  B.C. 

2 

2 

359 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE;    This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(Simulation) 


(1973  Actual) 

OREGON 

Between: 

Eugene 

and: 

-  San  Francisco,   Calif. 

8 

Medford 

and: 

-  San  Francisco,   Calif. 

6 

Portland 

and: 

-  Boise,   Idaho 

4 

-  Chicago,   III. 

11 

-  Dallas,    Tex. 

4 

-  Denver,   Colo. 

14 

-  Los  Angeles,   Calif. 

16 

-  Phoenix,   Ariz. 

2 

-  Reno,   Nev. 

6 

-  Sacramento,   Calif. 

2 

-  San  Francisco,   Calif. 

28 

-  Spokane,   Wash. 

8 

360 

COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulation) 

PENNSYLVANIA 


Between: 

AUentown 

and: 

-  Chicago,   III. 

3 

-  Pittsburgh.   Pa. 

7 

Scranton/Wilkes  Barre 

and: 

-  Chicago,   111. 

2 

-  Pittsburgh,   Pa. 

18 

Philadelphia 

and: 

-  Atlanta,   Ga. 

25 

-  Boston,   Mass. 

42 

-  Buffalo,   N.Y. 

4 

-  Charlotte,   N.C. 

6 

-  Cincinnati,  Ohio 

2 

-  Cleveland.  Ohio 

15 

-  Columbus,   Ohio 

5 

-  Dallas,  Tex. 

5 

-  Denver,   Colo. 

2 

-  Detroit,   Mich. 

14 

-  Ft.   Lauderdale,   Fla. 

7 

-  Hartford,   Conn. 

11 

-  Houston,   Tex. 

2 

-  Indianapolis,   Ind. 

2 

-  Jacksonville,   Fla. 

3 

-  Kansas  City,   Mo. 

2 

-  Los  Angeles,   Calif. 

10 

361 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd.  ) 


Page  2 


Average  Daily 
Non-Stop 
Services 
(1973  Actual) 
PENNSYLVANIA  (cont'd. ) 
Between; 
Philadelphia  (cont'd.  ) 
and: 

-  Miami,    Fla.  14 

-  Minneapolis/St.    Paul,   Minn.  4 

-  New  Orleans,   La.  3 

-  Norfolk,    Va.  11 

-  Orlando,    Fla.  2 

-  Pittsburgh,    Pa.  39 

-  Providence,   R.I.  7 

-  Raleigh/Durham,  N.C.  2 

-  Rochester,    N.  Y.  3 

-  St.   Louis,   Mo.  5 

-  San  Francisco,    Calif.  7 

-  Tampa,   Fla.  8 

-  Syracuse,   N.  Y.  6 

Pittsburgh 
and: 

-  AUentown,    Pa.  7 

-  Atlanta,    Ga.  15 

-  Baltimore,   Md.  12 

-  Boston,   Mass.  11 

-  Buffalo,    N.  Y.  17 

-  Charlotte,    N.C.  8 

-  Chicago,   111.  44 

-  Cincinnati,   Ohio  9 

-  Dallas.   Tex.  4 

-  Detroit,   Mich.  14 

-  Ft.   Lauderdale,   Fla.  5 

-  Greensboro/High  Point,    N.C.         2 

-  Harrisburg,   Pa.  18 

-  Hartford,   Conn.  10 

-  Houston,   Tex.  2 

-  Indianapolis,   Ind.  5 

-  Knoxville,   Tenn.  2 

-  Los  Angeles,   Calif.  3 

-  Miami,   Fla.  10 

-  Milwaukee,   Wis.  2 

-  New  Orleans,   La.  4 

-  New  York,   N.  Y.  61 


Services  Assigned 

at 
Maximum  Earnings 
(Simulation) 


362 


Page  3 
Comparison  of  Non-Stop  Scheduled  Services  (cont'd.) 

Average  Daily  Services  Assigned 

Non-Stop 


PENNSYLVANIA  (cont'd.  ) 
Between: 
Pittsburgh  (cont'd. ) 
and: 

-  Philadelphia,   Pa. 

-  Rochester,   N.Y. 

-  St.   Louis,   Mo. 

-  San  Francisco,   Calif. 

-  Tampa,   Fla. 

-  Tri  City,  Tenn. 

-  Washington,   D.C. 


at 
Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


!9  12 

4  2 

8  4 

2  2 


6  2 

2  2 

15  6 


363 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 

NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 
Services               Maximum  Earnings 

(1973  Actual)  (Simulation) 
RHODE  ISLAND 
Between: 
Providence 
and: 

-  Atlanta.  Ga.                                              2  2 

-  Chicago,   ni.                                           4  2 

-  Cleveland,  Ohio                                    2  2 

-  Philadelphia,   Pa.                                 7  2 

-  Washington.   D.  C.                               11  4 


364 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simvilated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


SOUTH  CAROLINA 
Between: 
Charleston 


and: 

-  Atlanta,   Ga.  6  4 

-  New  York.  N.Y.  2  2 

-  Norfolk.   Va.  6  2 

-  Washington.   D.  C.  4  4 

Columbia 
and: 

-  Chicago,   ni.  2  2 

-  New  York.  N.Y.  6  2 

-  Washington.  D.  C.  2  2 

Greenville /Spartanburg 
and: 

-  New  York.   N.Y.  6  2 

-  Washington.    D.  C.  2  2 


365 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

SOUTH  DAKOTA 
Between 
Rapid  City 
and: 

-  Denver,   Colo.  6  4 

-  Minneapolis /St.    Paul,   Minn.  2  2 

-  Salt  Lake  City.   Utah  2  2 

Sioux  Falls 
and: 

-  Denver,   Colo.  4  2 

-  Salt  Lake  City,   Utah  2  2 


;uu> 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
197S  Actual  vs.  Simulat«si  for  Profit  Maximisation 


Flighti 


Both  Directions 


NOTE:        This  oom|>i»r\son  does  not  include  c»t,v-fvj»»rs  \i\  which  profit 
maxmiiKation  xH'Ould  result  in  no  service,   and  it  does  not 
uviicato  t*\e  public  service  consequences  of  elimination  of 
;»dts^uAte  frtx^uonoics  to  meet  peak  demand. 


TENNESSEE 
Betxreen: 
Chattamx>ga 
aivi: 
-  Charlotte.  N.C 


Aver;\j;e  Daily 
Non-Stop 
Services 

(1S17S  Actual^ 


Services  Assipied 

at 

Maximum  Farniivgs 

(Simulation^ 


Knoxville 
and: 

-  Chicago.   111. 

-  Cincuuiati,  Ohio 

-  HuntsvUle/Decatur. 

-  Louisville,  K>'. 

-  Memphis.  Tenn. 

-  NashvUIe.   Tenn. 

-  Nevr  York.  N.Y. 

-  Pittsburgh.   Pa. 

-  Washington.  D.  C. 


Memphis 
aixi: 

-  Atlanta.  Oa.  18 

-  Birmingham,  Ala.  9 

-  Charlotte,  N.C.  4 

-  Chicago,  111.  19 

-  Cincinnati,  Ohio  S 

-  Dallas,   Texas  15 

-  Da>-ton,  Ohio  i 

-  Denver,  Colo.  i 

-  Detroit,  Mich.  3 

-  Houston.   Texas  S 

-  Indianapolis.   Ind.  7 

-  Jackson  Vicksburs:.    Miss.  16 


'MM 


CoinpariBon  of  Non-Stop  SchfJulfd  Servicee  (cont'd) 


l'at;<r  2 


TENNESSEF:  (cont'd) 
Between: 
MemphJB  (cont'd) 
and: 

-  Kansas  City,   Mo. 

-  Knoxville,   Tenn. 

-  Little  Rock.   Ark. 

-  LoB  Angeles,   Calil 

-  Louisville,   Ky. 

-  Nashville,   Tenn. 

-  New  Orleans,    La. 

-  New  York,   N.  Y. 

-  St.    Louis,    Mo. 

-  Shreveport,    La. 

-  Washington,   D.  C. 


Average  Daily  Servicee  Aissigned 

Non-Stop  at 

Service  Maximum  EarningB 

(1973  Actual)  (Simulation) 


Nashville 
and: 

-  Atlanta,   Ga. 

-  Chicago,   lU. 

-  Cincinnati,  Ohio 

-  Dallas/ Ft.    Worth,   Texas 

-  Houston,   Texas 

-  Knoxville,  Tenn. 

-  Little  Rock,   Ark. 

-  Memphis,   Tenn. 

-  New  Orleans,   La. 

-  New  York.   N.  Y. 

-  Tampa,   Fla. 

-  Tulsa,  Okla. 

-  Washington,   D.C. 


ill 


Pittsburgh,   Pa. 


368 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:         This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services 

(1973  Actual) 


Maximum  Earnings 
(Simulation) 


Between: 
Amarillo 
and: 

-  Dallas.   Texas 

-  Kansas  City,   Mo. 

-  Phoenix,   Ariz. 


Midland,  Texas 
Washington.   D.C. 


Brownsville 


Houston,   Texas 


Corpus  Christi 

and: 

-  Dallas.   Texas 

4 

Dallas 

and: 

-  Albuquerque,   N. M. 

11 

-  Alexandria,    La. 

4 

-  Amarillo,   Texas 

6 

-  Atlanta,  Ga. 

31 

-  Baltimore,   Md. 

5 

-  Boston,    Mass. 

2 

-  Chicago,   111. 

25 

-  Cincinnati,  Ohio 

7 

-  Cleveland,  Ohio 

5 

Page  2 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


TEXAS  (cont'd) 
Between: 
Dallas  (cont'd) 


and: 

-  Colorado  Springs,   Colo.  3 

-  Corpus  Christi,   Texas  4 

-  Denver,  Colo.  25 

-  Detroit,   Mich.  7 

-  El  Paso,   Texas  12 

-  Indianapolis,   Ind.  5 

-  Jackson/ Vicksburgh,   Miss.  3 

-  Kansas  City,   Mo.  18 

-  Las  Vegas,   Nev.  6 

-  Little  Rock,   Ark.  14 

-  Los  Angeles,   Calif.  26 

-  Louisville,   Ky.  3 

-  Lubbock,   Texas  19 

-  Memphis,   Tenn.  15 

-  Miami,   Fla.  11 

-  Midland/Odessa,   Texas  15 

-  Minneapolis /St.   Paul,   Minn.         4 

-  Nashville,   Tenn.  9 

-  New  Orleans,   La.  24 

-  New  York,   N.  Y.  25 

-  Orlando,   Fla.  2 

-  Philadelphia,   Pa.  5 

-  Phoenix,   Ariz.  17 

-  Pittsburgh,   Pa.  4 

-  Portland,   Ore.  4 

-  St.    Louis,   Mo.  14 

-  San  Diego.   Calif.  6 

-  San  Francisco,  Calif.  18 

-  Seattle,   Wash.  4 

-  Shreveport,   La.  17 

-  Tampa,   Fla.  7 

-  Tucson,  Ariz.  6 

-  Washington,   D,  C.  14 


Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


El  Paso 
and: 

-  Chicago,   Illinois 

-  Dallas,   Texas 

-  Los  Angeles,  Calif. 

-  San  Antonio.  Texas 


370 


Pages 


Comparison  o 


f  Non-stop  Scheduled  Services  (cont'd) 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


Services  Assigned 


TEXAS  (cont'd) 
Between: 
Houston 
and: 


-  Atlanta,   Ga. 

26 

-  Baltimore,   Md. 

2 

-  Brownsville,    Texas 

5 

-  Chicago,   111. 

14 

-  Cleveland,   Ohio 

2 

-  Denver,   Colo. 

9 

-  Las  Vegas,   Nev. 

6 

-  Little  Rock,   Ark. 

2 

-  Los  Angeles,   Calif. 

14 

-  Memphis,   Tenn. 

3 

-  Miami,   Fla. 

7 

-  Midland/Odessa,   Texas 

2 

-  Nashville,   Tenn. 

2 

-  New  Orleans,    La. 

36 

-  New  York,   N.Y. 

5 

-  Oklahoma  City,   Okla. 

3 

-  Philadelphia,   Pa. 

2 

-  Phoenix,   Ariz. 

1 

-  Pittsburgh,   Pa. 

2 

-  St.   Louis,   Mo. 

8 

-  San  Francisco,   Calif. 

5 

-  Shreveport,   La. 

7 

-  Tampa,    Fla. 

1 

-  Tulsa,   Okla. 

5 

-  Washington,   D.C. 

4 

Lubbock 

and: 

-  Albuquerque,   N.M. 

2 

-  Dallas,   Texas 

19 

-  El  Paso,   Texas 

4 

Midland/Odessa 

and: 

-  Albuquerque,    N.M. 

3 

-  Austin,    Texas 

4 

-  Dallas,   Texas 

15 

-  Denver,  Colo. 

2 

-  Houston,   Texas 

2 

-  San  Antonio,   Texas 

6 

Maximum  Earnings 
(Simulation) 


2 

2 

4 

2 

2 

2 

2 

6 

2 

2 

2 

2 
14 
4 
2 
2 
2 
2 
2 
2 
2 
2 
4 
2 


371 


Comparison  of  Non-Stop  Scheduled  Services  (cont'd) 


Page  4 


Average  Daily 
Non-Stop 
Services 

(1973  Actual) 


TEXAS  (cont'd) 

Between: 

San  Antonio 

and: 

-  Albuquerque,   N.  M. 

2 

-  Atlanta,   Ga. 

7 

-  Chicago,   111. 

7 

-  El  Paso,   Texas 

10 

-  Los  Angeles,   Calif. 

3 

-  Midland/Odessa,   Texas 

6 

-  New  Orleans,   La. 

3 

-  Phoenix,   Ariz. 

2 

-  San  Francisco,   Calif. 

3 

Services  Assigned 

at 

Maximum  Earnings 

(Simulation) 


372 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 


Flights  Per  Day  -  Both  Pi 


rections 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-stop  at 


Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


UTAH 
Between: 
Salt  Lake  City 
and: 

-  Casper,   Wyo. 

-  Chicago,   111. 

-  Denver,   Colo. 

-  Great  Falls,   Mont. 

-  Las  Vegas,  Nev.  1|^ 

-  Los  Angeles,   Calif. 

-  New  York.   N.  Y. 

-  Rapid  City,   S.  D. 

-  Reno,   Nev. 

-  Sacramento,   Calif. 

-  San  Francisco,   Calif. 

-  Sioux  Falls,   S.D. 


2  2 

15  6 

26  14 

2  2 

7  8 

12  6 

2  2 

2  2 

7  4 

2  2 

11  2 

2  2 


373 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:    This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


VERMONT 
Between: 
Burlington 
and: 
-   Detroit, 


374 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


Between: 
Newport- News 
and: 

-  Atlanta,   Ga.  2  2 

-  Chicago,   111.  2  2 

-  New  York,   N.  Y.  3  2 


and: 

-  Atlanta.  Ga.  5  4 

-  Charleston.   S.  C.  6  2 

-  Chicago,   111.  7  4 

-  Cleveland,   Ohio  2  2 

-  Jacksonville,    Fla.  1  2 

-  New  York,   N.  Y.  14  6 

Richmond 
and: 

-  Atlanta.  Ga.  8  4 

-  New  York,   N.  Y.  10  6 


375 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


NOTE:      This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 

Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 

WASHINGTON 


Between: 

Seattle 

and: 

-  Boise,   Idaho 

2 

-  Chicago,   m. 

15 

-  Dallas,   Texas 

4 

-  Denver,   Colo. 

13 

-  Kansas  City.   Mo. 

2 

-  Los  Angeles.   Calif. 

18 

-  Minneapolis/St.    Paul,   Minn.            8 

-  New  York.   N.  Y. 

5 

-  Omaha.   Neb. 

3 

-  Reno,   Nev. 

2 

-  St.   Louis,   Mo. 

3 

-  San  Diego.   Calif. 

2 

-  San  Francisco.   Calif. 

31 

Spokane 

and: 

-  Chicago,   ni. 

2 

-  Denver.   Colo. 

3 

-   Minneapolis /St.    Paul.    Minn.            4 

-  Portland.   Ore. 

8 

-  San  Francisco.   Calif. 

4 

376 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  ys.    Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  Include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assi 

Non-Stop  at 

Services  Maximum  Earnin 


(1973  Actual)  (Simulation) 


gs 


WEST  VIRGINIA 
Between: 
Charleston: 
and; 
-  New  York,    N.  Y. 


377 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-pairs  in  which  profit 
maximization  would  result  in  no  service,   and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily 

Non-Stop 

Services 

(1973  Actual) 


WISCONSIN 

Between; 

Milwaukee 

and: 

-  Atlanta,    Ga. 

6 

-  Boston,   Mass. 

2 

-  Cleveland,   Ohio 

6 

-  Denver,   Colo. 

6 

-  Las  Vegas,    Nev. 

1 

-  Los  Angeles,   Calif. 

4 

-  Minneapolis/St.   Paul.   Minn.       12 

-  New  York,   N.Y. 

16 

-  Pittsburgh,    Pa. 

2 

-  Tampa,   Fla. 

2 

-  Washington,   D.C. 

2 

Services  Assigned 


Maximum  Earnings 
(Simulation) 


378 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICE.- 
1973  Actual  vs.   Simulated  for  Profit  Maximization 

Flights  Per  Day  -  Both  Directions 


This  comparison  does  not  include  city-paii-s  in  which  profi 
maximization  would  result  in  no  service,    and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Assigned 
Non-Stop  at 

Services  Maximum  Earnings 
(1973  Actual)  (Simulatior,) 


Between; 
Casper 
and: 
-  Salt  Lake  City,    Utah 


379 

U.S.  Senate, 
Washinffton,  B.C.,  May  2,   1975. 
Mr.   George  W.   .Tames, 
Air  Transport  Association, 
Washinffton,  D.G. 

Dear  Mr.  James  :  I  have  received  and  reviewed  your  April  25  letter  and  the 
accompanying  study  relating  to  possible  consequences  of  deregulation  of  the 
scheduled  air  transport  industry.  I  want  to  thank  you  for  complying  with  the 
subcommittee's  request  that  you  undertake  a  study  and  for  the  efforts  you  and 
others  have  made  to  complete  it  in  a  timely  fashion. 

A  preliminary  review  of  the  study  suggests  that  basing  the  study's  computer 
model  on  the  predicted  behavior  of  a  monopolist,  as  was  done,  materially  affects 
the  accuracy  and  predictive  value  of  the  study.  This  monopolist  model  does  not 
take  into  account  the  fundamental  fact  that  deregulation  means  there  would  be 
a  competitive,  multiairline  environment,  in  which  any  particular  airline  would 
have  to  behave  as  a  competitor,  not  a  monopolist. 

Even  if  your  study  were  based  on  a  model  that  could  reasonably  identify 
"unprofitable"  routes  in  a  competitive  system,  the  conclusions  you  chose  to  draw 
in  your  letter  to  me  may  seriously  misstate  the  probable  level  of  air  service 
under  deregulation.  First,  several  of  the  nonstop  route  segments  identified  by 
the  ATA  as  candidates  for  cessation  or  reduction  of  service  have  in  fact  already 
been  abandoned  by  the  trunk  carriers  under  CAB  regulation.  Second,  of  those 
segments  presently  receiving  nonstop  trunk  service,  many  are  simultaneously 
served  by  local  .service,  intrastate,  or  commuter  carriers,  who  would  l)e  likely  to 
continue  or  even  increase  service  if  the  competing  trunk  carrier  reduced  or  dis- 
continued its  service.  Third,  a  significant  number  of  the  segments  do  in  fact  now 
receive  connecting,  one-  or  multistop  service  by  trunks,  local  service,  intrastate 
or  commuter  carriers,  so  reduction  or  discontinuance  of  nonstop  trunk  service 
would  certainly  not  mean  cessation  of  all  air  service  to  the  commiuiities  involved. 

One  further  ix)int.  According  to  United  Air  Lines,  which  serves  a  large  percent- 
age of  the  routes  you  claim  would  be  abandoned  if  carriers  were  free  to  do  so, 
many  of  the  so-called  "unprofitable"  nonstop  trunk  segments  are  in  reality  profit- 
able. As  United  explained  to  the  subcommittee  staff,  they  would  continue  to  be 
served  on  a  nonstop  basis  because  they  are  flown  in  order  to  feed  passengers  to 
other  segments  or  flights  which,  when  taken  together,  generate  sufl5cient  revenues 
to  cover  or  exceed  costs.  Even  other  nonstop  segments  you  identified  for  possible 
extinction  would  still  be  flown,  according  to  United,  because  they  are  used  to 
ferry  or  position  aircraft  that  are  better  flown  with  some  passengers  than  empty. 
There  is  every  reason  to  believe,  therefore,  that  the  otlier  trunk  airlines  would 
make  a  similar  analysis  of  their  so-called  "unprofitable"  routes. 

It  is  my  understanding  that  many  of  the  points  I  have  raised  were  discussed 
with  you  by  the  subcommittee  staff  prior  to  the  release  of  your  study,  and  that  the 
ATA  would  make  an  effort  to  verify  and  include  then  in  the  final  presentation 
and  release  of  the  study  itself.  In  any  case,  I  am  sure  you  would  agree  that  it  is 
important  to  present  a  fuller  and  more  accurate  analysis  than  is  implied  by  your 
April  25  letter  to  the  many  governmental,  industry  and  consumer  parties  who  are 
genuinely  interested  in  the  i.isues  of  regulatory  reform.  Accordingly,  I  would 
suggest  that  a  copy  of  this  letter  be  furnished  to  those  who  have  been  or  will  be 
furnished  copies  of  the  study. 

The  study  and  your  accompanying  conl^lusions  are  now  being  analyzed  more 
fully  by  tlie  subcommittee,  several  executive  agencies,  and  by  a  number  of 
economists  at  various  universities.  AVhen  these  analyses  are  completed,  I  will 
make  then  available  to  you. 

Thank  you  for  your  continuing  participation  in  the  subcommittee's  inquiry. 
Sincerely, 

Edward  M.  Kennedy, 
Chairman,  Subcommittee  on  Administrative  Practice  and  Procedure. 


380 

Air  Transport  Association  of  America, 

Washington,  D.C.,  May  8, 1975. 
Hon.  Edward  M.  Kennedy, 
U.S.  Senate, 
Washington,  D.C. 

Dear  Senator  Kennedy  :  Thank  you  for  your  May  2,  1975,  letter  commenting 
on  the  Air  Transport  Association's  April  25  study  on  "The  Consequences  of  De- 
regulation of  the  Scheduled  Air  Transport  Industry."  We  appreciate  the  elforts 
you  and  your  staff  have  made  in  reviewing  the  comprehensive  analysis  of  de- 
regulation of  the  present  airline  system  which  we  prepared  in  response  to  your 
request  of  February  7, 1975. 

Based  on  your  May  2  letter,  there  appears  to  be  a  shift  in  the  frame  of  refer- 
ence from  your  original  request  to  us  on  February  7,  in  that  your  interpretation 
of  the  study  is  based  on  a  different  premise  than  your  original  request  to  us. 

1.  In  your  February  7  letter,  which  is  attached,  you  asked  us  for  "a  list  of 
those  city-pairs  that  are  now  unprofitable  and  might  be  abandoned."  We  furnished 
such  a  list.  As  requested,  the  study  looked  at  each  route  in  the  present  trunk 
system  using  the  latest  available  data.  It  identified  372  nonstop  routes  where 
incremental  cost  exceeded  incremental  revenue,  a  condition  of  unprofitability 
which  highlights  such  routes  as  prime  candidates  for  abandonment.  These  372 
unprofitable  trunk  routes,  together  with  the  826  subsidized  routes  of  the  regional 
air  carriers,  comprised  the  list  you  requested  of  scheduled  airline  routes  which 
"are  now  unprofitable  and  might  be  abandoned." 

2.  You  suggest  that  our  study  may  be  inaccurate  because  you  feel  it  is  based 
on  the  "predicted  behavior  of  a  monopolist."  We  believe  such  a  conclusion  is  in- 
correct since  our  analysis  was  based  on  the  competitive,  multiairline  environ- 
ment actually  in  ))eing  in  the  present  route  patterns  of  18  trunk  and  regional 
air  carriers.  We  attempted  neither  to  contrive  a  monopolist  system  nor  to  recast 
the  present  national  system  of  competitive  air  service.  We  did,  however,  extend 
our  analysis  of  the  present  system  by  examining  the  possibility  of  increased  com- 
petition entering  the  currently  profitable  routes.  The  results  showed  a  lowering 
of  profitability  on  these  routes  as  well  as  an  increase  in  the  number  of  currently 
unprofitable  routes. 

3.  You  also  suggested  that  our  study  may  overstate  the  probable  decline  in 
air  service  resulting  from  deregulaton.  Mr.  Stephen  Breyer  of  your  staff  made 
similar  points  when  we  provided  him  with  a  preliminary  review  of  our  study 
on  April  17.  However,  as  indicated  in  my  letter  of  April  25.  some  service  over 
the  unprofitable  routes  identified  in  our  study  might  be  continued  for  such 
purposes  as  "feeding  heavier  traveled  routes  or  aircraft  positioning."  Neverthe- 
less, as  pointed  out  by  United  Air  Lines,  even  after  taking  these  factors  into 
account,  its  judgement  is  that  approximately  22  percent  of  all  United's  nonstop 
routes  would  likely  be  abandoned.  However,  it  is  our  belief  that  some  of  the ' 
possible  effect  of  deregulation  may  well  be  understated  in  our  report  when  all 
air  carrier  routes  are  considered,  since  deregulation  would  encourage  a  heavier 
concentration  on  the  more  productive  city-pair  markets  and  less  service  in  the 
marginal  markets. 

In  response  to  the  request  in  your  May  2  letter,  we  will  send  a  copy  of  that  letter, 
along  with  our  response,  to  those  who  were  or  will  be  furnished  a  copy  of  our 
original  study. 
Sincerely, 

George  W.  James, 
Senior  Vice  President.  Economics  and  Finance. 


[Sample  of  the  letters  requesting  an  evaluation  of  the  ATA  study :] 

U.S.  Senate, 
April  29,  1915. 
Prof.  Roger  Sherman, 

Department  of  Economics,  University  of  Virginia, 
Charlottesville,  Va. 

Dear  Professor  Sherman  :  The  Subcommittee  on  Administrative  Practice  and 
Procedure,  which  I  chair,  has  just  completed  10  days  of  public  hearings  on  Fed- 


381 

eral  regulation  of  the  airlines.  During  the  course  of  those  hearings,  Dr.  George 
James  of  the  Air  Transport  As.sociation  of  America  testified  that  in  his  view 
deregulation  would  result  in  substantial  reduction  of  air  service  to  small  com- 
munities, and  promised  to  undertake  an  empirical  study  concerning  that  assertion. 
I  am  enclosing  a  copy  of  the  completed  study  and  the  covering  letter  from 
Dr.  James. 

The  subcommittee  would  find  it  most  helpful  if  you  would  undertake  to  re- 
view the  ATA  study  and  provide  comments  to  the  subcommittee  concerning  the 
technical,  economic,  and  policy  implications  of  the  study.  I  would  specifically 
appreciate  your  views  on  whether  the  conclusions  stated  in  Dr.  James'  letter  are 
in  fact  supported  by  the  study  itself.  As  an  independent  economist  of  recognized 
ability,  your  assistance  in  this  regard  will  be  most  valuable. 

If  you  have  any  questions,  please  contact  Mr.  Stephen  Breyer,  special  counsel  to 
the  subcommittee,  at  (617)  495-i276  or  Mr.  Philip  Bakes,  assistant  counsel,  at 
(202)  224-5617. 

Thank  you  for  your  assistance  and  cooperation. 
Sincerely, 

Edward  M.  Kennedy, 

Chairman. 


THE  CHAIRMAN   OF  Th 
COUNCIL  OF   ECONOMIC  AC 
WASHINGTON 


May  1,    1975 


Dear  Senator  Kennedy: 

This  is  in  response  to  your  letter  of  April  28,    1975,    requesting 
the  Council's  views  on  the  recent  Air  Transport  Association  report. 
Consequences  of  Deregulation  of  the  Scheduled  Air  Transport  System: 
An  Analytical  Approach  and  the  conclusions  stated  in  Dr.   George 
James'  letter  of  transmittal  dated  April  25,    1975, 

I  have  asked  James  C.    Miller,    Senior  Staff  Economist  at  the 
Council  of  Economic  Advisers  in  the  transportation  and  regulation 
area  to  evaluate  that  study  and  the  letter  of  transmittal.     His  report 
to  me  is  attached.     As  you  will  note,    Dr.    Miller  questions  both  the 
adequacy  and  the  conclusions  reached  by  the  ATA   study.     He  especially 
takes  issue  with  the  conclusion  that  deregulation  would  lead  to  a 
substantial  reduction  in  scheduled  air  service. 

Thank  you  for  giving  the  Council  an  opportunity  to  express  its 
views  on  this  important  matter. 


Alan  G 


Senator  Edward  M.    Kennedy 

Chairman,    Subcommittee  on  Administrative 

Practice  and  Procedure 
United  States  Senate 
Washington,   D.   C.     20510 


OV-UT'O^V^ 


^e^ 


5 


(382) 


383 


UNITED  STATES  GOVERNMENT 

Memorandum 


Alan  Greenspan 
Chairman 


date:   May  1,  1975 


III 
'I   Economist 


Air  Transport  Association's  Analysis  of  the  Consequences 
of  Airline  Deregulation 


This  is  in  response  to  your  request  for  my  assess- 
ment of  the  Air  Transport  Association's  (ATA's)  recent 
report,  Consequences  of  Deregulation  of  the  Scheduled 
Air  Transport  Industry;   An  Analytical  Approach,  and 
whether  it  supports  the  conclusions  contained  in  Dr.  James 
letter  of  transmittal  to  Senator  Kennedy  dated  April  25, 
1975. 

The  ATA  study  is  in  response  to  Senator  Kennedy's 
request  for  the  industry  to  identify  those  "scheduled 
routes  where  service  might  be  reduced  or  eliminated  if 
each  airline  could  set  its  own  prices  and  could  enter  or 
exit  any  market  at  will"  (Dr.  James'  letter,  p.l).   The 
study  concludes  that  of  the  994  trunk-carrier  routes 
analyzed,  "372  could  be  candidates  for  elimination  under 
deregulation,  while  nearly  all  of  the  remaining  622  could 
experience  sharp  curtailment  of  service"  (letter,  p.  1) . 
The  ATA  also  suggests  that  the  826  nonstop  routes  of  the 
local  service  carriers  identified  as  presently  receiving 
subsidy  would  be  candidates  for  elimination  under  de- 
regulation.  The  ATA  therefore  concludes  that,  "[i]t  is 
conceivable  that  the  1,198  unprofitable,  and  subsidized, 
routes  might  not  survive  in  a  deregulated  environment 
except  in  limited  instances  as  an  adjunct  to  more  profit- 
able routes  or  under  large  subsidy  payments  by  cities  or 
the  federal  government"  (letter,  p.  2) . 

This  memorandum  evaluates  the  operations  research 
model  on  which  most  of  the  ATA's  conclusions  are  based, 
ATA's  interpretation  of  that  model,  the  ATA's  other 
analysis,  and  the  issue  of  cross-subsidy. 


Buy  U.S.  Savings  Bonds  Regularly  on  the  Payroll  Savings  Plan 


384 

-  2  - 

Lockheed's  Airline  System  Simulation-^ 

With  respect  to  the  effects  of  deregulation  on  trunk 
airline  service,  the  ATA's  conclusions  arc  based  primarily 
on  Lockheed's  Airline  System  Simulation  ("simulation"  or  *| 
"model").   The  development  of  this  model  was  begun  in  1959 
under  the  overall  direction  of  William  A.  Gunn.   It  was 
improved  during  1960  and  1961  and  became  operational  at' 
that  time.   In  its  present  configuration  the  model  is  cap- 
able of  simulating  an  airline  routing  network  of  up  to 
250  city  pairs.   The  model's  objective  is  to  maximize  (net) 
earnings  and  its  major  outputs  are  the  number  and  kinds 
of  (optimal)  aircraft  and  the  routes  served. 

As  airline  simulations  go,  the  Lockheed  model  is 
a  good  one,  being  widely  used  and  well  respected.   However, 
in  my  judgement  models  of  this  type  should  be  used  with 
extreme  caution  when  put  to  special  uses  for  which  they 
were  not  primarily  designed,  such  as  identifying  markets 
likely  to  be  abandoned  under   "deregulation"  .£./ Models 
such  as  these  may  be  valuable  tools  for  designing  new 
aircraft  (payload,  range,  et  cetera)  or  for  suggesting 
to  airline  scheduling  officials  which  markets  to  consider 
exploiting  and  which  to  consider  abandoning,  but  they  are 
inherently  limited  when  it  comes  to  answering  specific 
questions  such  as  whether  the  route  between  points  A  and 
3  is  presently  uneconomic,  much  less  whether  under  a 
changed  market  environment  (i.e.,  deregulation)  the  route 
would  be  uneconomic  and,  therefore  presumably,  abandoned. 


\/   This  discussion  is  based  on  descriptions  found  in 
the  following  publications:  Consequences  of  Deregulation 
of  the  Scheduled  Air  Transport  Industry;  An  Analytical 
Approach  (Washington:  Air  Transport  Association,  April  1975); 
Lockheed  Airline  System  Simulation  (Burbank:  Lockheed- 
California  Company,  i;.d.);  Revisions  to  1969  Lockheed 
Indirect  Operating  Expense  Method  (BurbanK:  Lockheed- 
California  Company,  July  1974);  and  William  A.  Gunn,  "Airline 
System  Simulation,"  Operations  Research   (March  1964) , pp. 206- 
29. 

2/   For  purposes  of  this  memorandum,  "deregulation"  may 
be  regarded  as  the  removal  of  all  economic  (but  not  safety) 
regulation  and  subjecting  the  industry  to  the  antitrust  laws. 
This  appears  to  be  what  the  ATA  means  by  the  term.   It  is 
notable  that  none  of  the  Administration  proposals  presently 
under  review  contemplate  this  extreme  form  of  deregulation. 
Although  regulatory  controls  would  be  substantially  reduced, 
some  economic  regulation  would  remain. 


385 


A  first  problem  is  the  degree  of  realism  that  these 
models  are  able  to  achieve.   In  my  Ph.D.  disseration  ,  ±/ 
for  example,  I  attempted  to  construct  a  "realistic"  airline 
routing  model  —  one  that  accounted  for  indivisibility 
problems  as  well  as  for  consumer  preferences  concerning 
the  time  of  day  they  travel.   The  result  was  that  a  single 
run  of  this  one  city-pair  market  simulation  took  over  half 
an  hour,  utilizing  the  entire  32  thousand  word  core  of  a 
Burroughs  5500  computer.   Since  the  complexity  of  the  problem 
tends  to  increase  geometrically  with  the  number  of  city 
pairs  examined,  any  model  which  accommodates  up  to  250  city 
pairs  must  make  simplifying  assumptions.   As  I  concluded 
later  in  a  work  based  on  that  disseration, 

"The  utilization  of  scheduling  models... to 
appraise  airline  efficiency  awaits  the  develop- 
ment of  technically  superior,  operational  programs. 
But  just  as  importantly,  much  work  needs  to  be 
done  in  the  formulation  and  testing  of  behavioral 
assumptions,  for  only  then  can  we  place  a  great 
deal  of  confidence  in  our  results. "£/ 

In  terms  of  the  Lockheed  model's  specific  assumptions 
(as  they  relate  to  the  question  of  uneconomic  flight  seg- 
ments) ,  the  cost  issues  are  perhaps  the  most  important. 
While  the  simulation  bases  its  decisions  to  add  route 
segments  on  "marginal  costs,"  included  in  these  marginal 
costs  are  depreciation  expenses  (ATA  study,  p.  5) .   The 
reason  is  that  the  simulation  "purchases"  aircraft  to  assign 
to  the  routes  brought  into  the  system.   During  off-peak 
hours,  the  relevant  (opportunity)  cost  of  equipment  may  well 
be  zero  and  thus  inclusion  of  depreciation  in  the  decision 
calculus  tends  to  eliminate  some  routes  that  might  well  be  . 
served  by  a  profit-maximizing  air  carrier.   Certainly,  we 
observe  a  tendency  today  for  "marginal"  routes  to  be  served 
during  off-peak  hours.   A  similar  overestimation  of  costs 
on  "marginal"  routes  may  obtain  when  aircraft  have  to  be 
"positioned"  to  meet  the  daily  cycle,  for  maintenance,  and 
for  other  purposes. 

1/   James  C.  Miller  III,  Scheduling  and  Airline 
Efficiency  (Charlottesville:  Department  of  Economics, 
University  of  Virginia,  1969) . 

2/   James  C.  Miller  III,  "A  Time-of-Day  Model  for 
Aircraft  Scheduling,"  Transportation  Science  (August  1972), 
p.  243. 


386 


-  4  - 

On  the  revenue  side,  there  is  likewise  a  problem 
of  allocation.   As  is  well  known,  carriers  are  perfectly 
willing  to  engage  in  the  practice  of  scheduling  "feeder" 
routes,  even  though  the  conventionally-apportioned  costs 
of  such  routes  may  fall  short  of  the  revenues  conventionally 
attributed  to  them.   The  reason  is  that  many  feeder  passengers 
connect  to  other  flights  of  the  same  carrier  on  which  pro- 
fits would  be  recorded.   In  other  words,  the  carrier  earns 
more  money  by  scheduling  allegedly  uneconomic  services. 
This  is  not  to  suggest  that  there  is  cross-subsidization 
of  routes:   merely,  the  conventionally  recorded  revenue/ 
cost  margins  do  not  reflect  the  relevant  revenue/cost 
margins  (i.e.,  those  perceived  by  the  carrier).   While  the 
sequential  mapping  of  flights  accomplished  by  the  model  takes 
into  account  some  of  this  phenomenon,  it  may  not  accomodate 
it  all  and  therefore  may  identify  many  routes  as  uneconomic 
which  a  profit-maximizing  carrier  would  choose  to  operate. 

Finally,  as  will  be  stressed  in  the  next  section,  the 
model  is  incapable  of  simulating  competition.   It  is 
designed  for  an  analysis  of  a  single  firm.   The  model  can 
simulate  the  reaction  of  rivals  with  what  appears  to  be 
either  of  two  extreme  assumptions  (at  the  option  of  the 
user):   (a)  completely  passive  behavior  (i.e.,  rival  firms 
make  no  change  in  their  scheduling  plans  when  the  initiating 
carrier  makes  changes) ,  and  (b)  proportional  market  shares 
(i.e.,  rival  firms  react  to  any  schedule  change  so  as  to 
maintain  a  fixed  market  share) .   Under  the  second  assump- 
tion, the  result  is  clearly  a  price-regulated  monopoly 
solution  in  each  market. 1/   Under  conditions  where  there  is 
no  rival  Tas  must  be  the  case  in  the  analysis  performed 
for  ATA),  the  same  (regulated-monopoly)  result  obtains. 

ATA's  Interpreation  of  the  Simulation 

The  interpretation  the  ATA  has  placed  on  the 
simulation  excessively  overstates  the  extent  of  route 
abandonments  that  might  take  place  under  deregulation. 
As  mentioned  above,  the  model  is  capable  of  simulating 
price-regulated  monopoly,  but  not  free  and  open  competition . 2/ 

1/   See  George  W.  Douglas  and  James  C.  Miller  III, 
Economic  Regulation  of  Domestic  Air  Transport:  Theory  and 
Policy  (Washington:  The  Brookings  Institution,  1974), 
Chapter  IV. 

2/  This,  interestingly,  contradicts  the  usual  industry 
assessment  that  the  result  of  deregulation  would  be  excess 
(not  insufficient)  competition. 


387 


At  best  the  model  can  identify  uneconomic  routes  —  and, 
as  I  have  indicated,  there  is  reason  to  believe  that  the 
model  tends  to  overstate  these. 

A  better  idea  of  what  the  simulation  .u'compliGhes 
can  be  obtained  by  referring  to  the  attached  figure, 
adapted  from  Figure  8  of  the  ATA  study.   As  shown,  under 
the  prices  prevailing  in  1973,  a  nation-wide  (price- 
regulated)  monopoly  air  carrier  (or  a  perfectly  administered 
price-regulated  airline  cartel)  would  schedule  2,500  flights 
daily,  would  realize  average  load  factors  of  81.6  percent, 
and  would  earn  net  revenue  of  $5.5  million  per  day  (see 
also  ATA  study,  p.  7).   If  all  fares  were  reduced  (the 
same  percentage) ,  the  monopoly  level  of  flights  and  earnings 
would  fall,  but  average  load  factors  would  increase  (reference 
curves  labeled  "-10%"  and  "-20%").   These  levels  of  opera- 
tions ATA  contrasts  with  1973  regulated  operations  of 
approximately  7,300  daily  flights,  a  system-wide  average 
load  factor  of  55.7  percent,  and  approximately  $1.1  million 
in  daily  net  earnings. V  If  there  were  deregulation,  accord- 
ing to  the  ATA,  the  model  would  indicate  a  deletion  of 
approximately  4,800  daily  flights  based  on  a  1973  level  of 
operations.   With  a  fare  reduction  of  10  percent,  approxi- 
mately 5,130  flights  would  be  eliminated;  and  with  a  20 
percent  fare  reduction  approximately  5,322  flights  would  be 
dropped.   The  ATA  also  concludes  that  in  eliminating  the 
flights  the  industry  would  abandon  372  non-stop  markets 
at  1973  fares,  471  non-stop  markets  at  a  10  percent  fare 
decrease,  and  564  non-stop  markets  at  a  20  percent  fare 
decrease  (ATA  study,  p.  7). 

The  logic  of  ATA's  assumption  of  a  price-regulated 
monopoly  outcome  under  deregulation  can  be  tested  with 
common  sense.   An  earnings  level  of  $5.5  million  per  day 
(1973  fares)  translates  into  yearly  earnings  of  approxi- 
mately $2,008  million.   On  the  basis  of  1973  total  domestic 
trunkline  investment  of  $8,051  million,  this  translates 
into  a  rate  of  return  on  investment  (ROI)  of  approximately 
25  percent.!/  Presumably,  however,  in  equilibrium,  the 


1/  The  1973  levels  of  flights  and  earnings  are 
approximate  since  they  are  read  from  the  figure;  the  ATA 
does  not  present  the  data. 

2/  The  ATA  study  is  not  clear  whether  these 
earnings  are  profits  before  interest  payments  on  long- 
term  debt  and  before  taxes,  after  interest  payments  on 
long-term  debt  but  before  taxea,  or  before  interest  pay- 
ments on  long-term  debt  but  after  taxes.   Comparisons  of 
ROI  would  of  course  depend  on  the  definition  used. 


388 


389 


-  7  - 

industry  would  reduce  its  investment  base  consonant  with 
the  lower  level  of  operations.   Assuming  a  proportional 
reduction,  the  (1973)  investment  base  would  be  approxi- 
mately $2,757  million,  indicating  a  ROI  of  api)roximatcly 
73  percent.   To  presume  that  under  conditions  of  free  entry 
a  73  percent  ROI  would  not  attract  new  entrants  is  pre- 
posterous! 

What  would  likely  occur  under  deregulation  can  be 
inferred  from  the  graph.   First,  assuming  for  the  sake 
of  argument  that  1973  fares  prevailed  and  that  cost  levels 
did  not  change,  increased  scheduling  would  occur  until 
load  factors  had  been  driven  down  to  approximately  55 
percent  —  the  1973  break-even  level.   At  that  point  there 
would  be  approximately  7,400  flights  daily  and  the  industry's 
daily  earnings  would  be  approximately  $1.0  million.   Now, 
assuming  again  that  costs  did  not  change,  on  the  basis  of 
my  work  with  George  Douglas,  1^/  one  might  predict  that 
average  fares  (or  average  yield)  would  decrease  approxi- 
mately 16  percent,  raising  the  break-even  load  factor  to 
approximately  65  percent.   As  can  be  inferred  from  the  figure 
(see  added  straight  line  connected  to  "L.F.  =  75%"  point 
on  1973  curve  )  ,  the  result  would  be  a  decrease  in  scheduling 
from  approximately  7,300  flights  per  day  to  approximately 
6,800  flights  per  day. 2/  Using  ATA's  1973  route  abandonment 
figure  of  372  and  applying  a  rule  of  proportionality,  this 
\;ould  imply  the  abandonment  of  approximately  39  non-stop 
city-pair  markets.    However,  any  decrease  in  costs  under 
deregulation  (less  circuitous  routings,  greater  management 
efficiency,  et  cetera)  would  shift  all  of  the  curves  to  the 
right.   Depending  on  the  degree  of  efficiency  gains,  the 
result  might  well  be  an  increase  in  total  scheduling  and 
an  increase  in  the  number  of  city-pair  markets  served  under 
deregulation,  not  decreases. 

ATA's  Other  Analysis 

The  ATA  also  identifies  1,198  local  service  carrier 
routes  which  are  presently  receiving  subsidy  and  thus 
might  not  be  served  if  there  were  deregulation.   While 

_!/  Douglas  and  Miller,   ibid. 

2/   The  exact  position  of  this  line  cannot  be  ascer- 
tained without  access  to  the  simulation.   The  position 
shown  is  an  informed  judgement.   (It  must  slope  downward 
to  the  right  since,  with  lower  fares  and  more  passengers, 
scheduling  must  increase  in  order  to  maintain  the  same  load 
factor  level. ) 


390 


undoubtedly  some  of  these  routes  might  be  deleted  under 
deregulation,  it  would  be  a  mistake  to  conclude  that  under 
deregulation  all,  or  even  a  substantial  part,  of  them  would 
receive  no  air  service. 

First,  the  CAB's  subsidy  program  (in  theory  nt  least) 
covers  all  the  losses  the  local  service  carriers  incur  in 
serving  these  routes.   Deregulation  does  not  necessarily 
imply  elimination  of  the  subsidy  program. V  With  continued 
subsidy  there  is  little  reason  to  believe  that  carriers 
would  not  willingly  serve  the  substantial  majority  of  these 
markets.  2^/ 

Second,  the  combination  of  subsidy  and  regulation  has 
tended  to  escalate  the  costs  of  the  local  service  carriers. 
An  example  with  which  I  am  familiar  illustrates.   In  1973 
Texas  International  Airways,  a  local  service  carrier, 
applied  to  the  CAB  to  delete  service  at  College  Station, 
Texas.   Reason?   Texas  International  was  losing  its  market 
to  a  small  College  Station-based  commuter,  Davis  Airlines. 
Both  were  offering  service  to  Dallas  and  to  Houston.   Both 
charged  $27  to  Dallas,  while  Davis's  $20  rate  to  Houston 
was  a  dollar  less  than  Texas  International's.   But  while 
Davis  was  making  money  at  these  rates,  the  Board  was  forced 
to  conclude  that  Texas  International  was  losing  $41  per 
enplaned  passenger. V  In  short   while  Davis's  cost  per 
passenger  was  in  the  neighborhood  of  $20-$27,  Texas 
International's  cost  was  in  the  neighborhood  of  $62-$68. 
Thus,  under  deregulation  the  local  service  carriers  might 
well  become  more  efficient  and  thus  be  able  to  serve  some 
markets  now  receiving  Federal  support  without  the  need  of 
subsidy. 

Third,  even  if  local  service  carriers  abandoned 
these  markets  one  must  not  overlook  the  outstanding  success 
of  the  (unregulated)  commuter  airlines  in  providing  service 
to  small  communities  and  serving  low-density  markets. 
According  to  the  commuter  airlines'  trade  association, 131 
commuter  airlines  listed  schedules  in  the  October  1,  1974 
issue  of  the  Official  Airline  Guide.   Of  the  665  airports 

"y   The  regulatory  reform  proposals  the  Administration 
presently  has  under  review  do  not  alter  the  Board's  subsidy 
program. 

2/   Indeed,  if  the  subsidy  program  were  improved,  then 
many  more  routes  might  receive  service  for  the  same  cost  to 
the  Federal  Government.  [See  George  C.  Eads,  The  Local  Service 
Airline  Experiment  (Washington:  The  Brookings  Institution, 
1972).] 

3/  See  CAB  Order  73-4-49  (April  10,  1973). 


391 


-  9  - 

analyzed,  210  (31.6  percent)  wera  served  exclusively  by 
commuter  airlines;  256  (38.5  percent)  were  served  ex- 
clusively by  CAB-certif icated  airlines;  and  199  (29.9 
percent)  were  served  jointly  by  certificated  and  commuter 
airlines.   In  serving  a  total  of  409  airports,  the  commuter 
airlines  served  over  1,530  city-pair  markets. V  These 
unregulated  carriers  have  accomplished  this  record  despite 
constraints  on  the  size  of  aircraft  they  may  fly.2_/  One 
must  conclude  that  of  local  service  markets  that  were 
abandoned  under  deregulation,  most  of  them  would  be  picked 
up  by  commuter  carriers. 

The  ATA  also  presents  an  analysis  of  flight  segment 
load  factors  and  concludes  that  raising  system  load 
factors  from  55.7  percent  to  60  percent  would  have  required 
the  elimination  of  144,000  (or  37  percent  of  all)  flights 
during  the  month  of  August  1973, and  raising  average  load 
factors  to  65  percent  would  have  required  the  elimination 
of  226,000  flights  (ATA  study,  Figure  11). 

This  analysis  is  grossly  misleading.   First,  it  assumes 
that  passengers  on  deleted  (low-load  factor)  flights 
are  lost  entirely.   In  markets  where  flights  are  reduced 
(but  not  eliminated) ,  many  of  these  passengers  would  travel 
on  the  remaining  flights;  although  this  would  raise  the 
system  average  load  factor,  the  ATA  analysis  ignores  the 
effect.   Second,  an  increase  in  load  factors  would  pre- 
sumably be  accompanied  by  a  fare  reduction.   Although  waiting 
time  would  increase,  the  full  cost  of  service  (i.e.,  ticket 
price  plus  cost  of  waiting)  would  diminish.   This  would 
bring  forth  additional  passengers  and  raise  load  factors  — 
another  important  effect  the  ATA  analysis  ignores.   Finally, 
as  mentioned  before,  deregulation  may  be  expected  to  increase 
carrier  efficiency  (lowering  costs)  so  that  even  with  the 
increased  system  average  load  factor  the  amount  of 
scheduling  might  actually  increase. 


1/   National  Air  Transportation  Association,  "AirTran 
News" (April  1975),  p.  16. 

2/  CAB  Part  298  regulations  limit  commuters  to 
operating  aircraft  of  not  more  than  30  passengers  and  not 
more  than  7,500  pounds  payload.   (Exceptions  to  these 
limitations  are  occasionally  granted  on  a  case-by-case 
basis.  ) 


392 


-  10  - 

The  Issue  of  Cross-Subsidy 

Underpinning  the  ATA's  conclusion  that  there  would 
be  significant  abandonment  of  service  is  the  assumption 
that  the  industry  is  presently  characterized  by  a 
significant  degree  of  cross-subsidy.   Such  an  assumption 
is  inappropriate.   First,  the  work  Douglas,  I,  and  some 
others  have  done  suggests  that  the  extent  of  cross-subsidy 
presently  existing  is  miniscule.   For  example,  the  major 
alleged  source  of  cross-subsidy  is  in  the  structure  of 
fares  with  respect  to  distance  (i.e.,  long-haul  flights 
subsidize  short-haul  flights) .   However,  taking  into 
account  the  fact  that  directly  subsidized  markets  are 
predominantly  short-haul  and  the  "feeder"  characteristic 
of  scheduling  described  above,  average  load  factors  show 
a  monotonic  decrease  with  respect  to  distance,  consistent 
with  the  argument  that  carriers,  through  non-price  competi- 
tion, configure  scheduling  so  as  to  approximate  break  even, 
whatever  the  distance.   Second,  I  understand  from  experts 
on  CAB  certificates  that  a  large  proportion  of  the  routes 
served  by  trunk  carriers  which  are  alleged  to  be  uneconomic 
are  capable  of  being  abandoned  without  CAB  approval.   It  is 
unreasonable  to  assume  that  carrier  management  views  their 
respective  firms  as  eleemosynary  institutions.   If  they  do, 
then  surely  their  stockholderE  should  be  made  aware  of 
this  fact! 

To  the  extent  that  cross-subsidy  does  obtain,  on 
economic  efficiency  grounds  it  ought  to  be  eliminated.!/ 
There  is  no  such  thing  as  a  "free"  lunch.   If  some  un- 
economic services  are  being  provided,  this  means  that 
travelers  on  "profitable"  routes  are  paying  excessive 
fares.   Besides  the  efficiency  question,  there  is  an 
equity  problem.   In  the  words  of  Richard  Caves,  "there  is 
no  reason  why  impoverished  grandmothers  flying   from  New 
York  to  Los  Angeles  should  be  the  ones  to  subsidize  well- 
off  businessmen  traveling  between  small  towns.  "2^/  Moreover, 
cross -subsidy  is  a  hiaden  subsidy.   It  would  appear  that 
from  the  standpoint  of  economic  efficiency,  equity,  and 
rational  decision  making,  the  subsidy  should  be  made  explicit. 


1/  Importantly,  the  CAB  has  concluded  that  cross- 
subsidy  is  contrary  to  the  public  interest  and  has  taken 
steps  to  eliminate  whatever  remains.   See  CAB  Order  73-3-82 
(March  18,  1974) . 

2/  Richard  E.  Caves,  Air  Transport  and  Its  Regulators; 
An  Industry  Study  (Cambridge:  Harvard  University  Press, 
1962),  p.  436. 


393 


-  11  - 

If  it  is  in  the  national  interest  to  provide  service 

that  otherwise  would  not  be  provided,  then  there  should 

be  a  Federal  direct  subsidy.   If  the  interest  is  "regional", 

then  perhaps  States  should  defray  the  costs;  if  the  interest 

is  purely  local,  then  communities  should  provide  the  support. 

Conclusions 

While  the  ATA  has  made  a  bold  attempt  to  identify 
the  services  that  might  be  abandoned  under  deregulation, 
its  analysis  is  grossly  wide  of  the  mark.   First, 
simulation  models,  calibrated  on  industry  performance 
under  regulation,  have  limited  usefulness  in  predicting 
outcomes  under  deregulation.   The  particular  model  utilized 
by  the  ATA,  while  reoutable,  incorporates  several  assump- 
tions that  may  lead  to  an  overstatement  of  uneconomic  routes . 
Second,  the  ATA  has  misinterpreted  what  the  model  accomplishes. 
While  the  ATA  claims  the  model  simulates  competition  it 
does  nothing  of  the  sort;  rather,  it  simulates  a  price- 
regulated  monopolist.   Third,  to  the  degree  the  model's 
outcome  can  be  interpreted,  it  suggests  that,  given  the 
existing  cost  level,  deregulation  would  lead  to  only  a  minor 
decrease  in  service;  efficiency  gains  under  deregulation 
might  well  result  in  more,  rather  than  less,  service.   Fourth, 
while  under  deregulation  some  city  pairs  might  lose  service 
by  the  certificated  (trunk  and  local  service)  carriers, 
there  is  good  reason  to  believe  that  commuter-type  (scheduled) 
airlines  would  provide  replacement  service. 

Finally,  the  argument  that  under  deregulation  city  pairs 
would  lose  service  assumes  that  there  exists  a  considerable 
degree  of  cross-subsidy.   Theory  and  evidonco  does  not 
support  this  view,  and  in  any  event  the  Board  has  enunciated 
a  policy  of  purging  it  from  the  system.   Cross-subsidy  is 
economically  inefficient,  inequitable,  and,  given  its 
hidden  nature,  tends  to  lead  to  inefficient  political 
decision  making.   To  the  degree  there  is  a  public  interest 
in  providing  services  that  otherwise  would  be  abandoned, 
such  support  should  come  directly  from  the  government. 


394 


EXECUTIVE  OFFICE   OF  THE  PRESIDENT 

COUNCIL  ON  WAGE  AND  PRICE  STABILITY 

WASHINGTON,  D.C.   20506 


May  1,  1975 


Honorable  Edward  M.  Kennedy 
Chairman,  Subconunittee  on 

Administrative  Practice 

eund  Procedure 
Committee  on  Government  Operations 
United  States  Senate 
Washington,  D.  C.   20510 

Dear  Senator  Kennedy: 

As  requested  by  your  letter  of  April  28, 
I  have  had  my  staff  analyze  the  Air  Transport  Asso- 
ciation Study  "Consequences  of  Deregulation  of 
Scheduled  Air  Transport  Industry."   I  am  attaching 
two  staff  memos  by  George  Eads  which  contain  his 
reaction  to  the  ATA  analysis.   As  you  will  see, 
Mr.  Eads  concludes  that  the  ATA  simulation  provides 
no  useful  information  about  the  likely  effects  of 
"deregulation"  since  the  system  being  simulated  by 
the  ATA  bears  no  resemblance  to  the  current  U.S.  air 
transport  system.   Specifically,  the  model  simulates 
the  behavior  of  monopolist;  we  currently  have  a  system 
with  multiple  competitors. 

I  hope  this  material  will  be  of  assistance 
to  you. 

Sincerely, 


CuJL^(2su^ 


Albert  Rees 
Director 


Enclosures 


395 


eXECUTIVE  OFFICE   OF  TME  PRESIDENT 

CXHiNCIL  ON  WAGE  AND  PRICE  STABILITY 

WASHINGTON,  D.C.   30S06 


April  29,  1975 


MEMORANDUM  TO:    Albert  Rees,  Director 

Council  on  Wage  and  Price  Stability 

FROM:  George  Eads,  Assistant  Director    ju.t- 

Government  Operations  and  Research 

SUBJECT:  Analysis  of  the  ATA  Simulation  Model: 

"Consequences  of  Deregulation  of  the 
Scheduled  Air  Transport  Industry" 

In  drafting  legislation  to  reform  economic  regu- 
lation of  the  airline  industry,  we  in  the  Administration 
have  always  been  aware  that  a  balance  must  be  struck  between 
preserving  those  features  of  the  current  system  that  are 
necessary  to  protect  the  public  interest  while  modifying 
those  which  do  not.   We  welcome  the  input  of  the  Air  Trans- 
port Association.   We  believe  that  they  provide  a  perspective 
that  needs  presenting. 

However,  the  current  ATA  effort  titled  "Consequences 
of  Deregulation  of  the  Scheduled  Air  Transport  Industry"  does 
nothing  to  aid  us  in  settling  these  admittedly  complex  issues. 
It  raises,  as  though  they  were  novel,  analytical  issues  that 
have  long  been  settled  as  the  result  of  extensive  study, 
evidentiary  hearing,  and  cross-examination.   In  particular, 
it  raises  the  specter  of  wholesale  route  abandonment  and 
flight  curtailment  as  a  result  of  the  elimination  of  "cross- 
subsidy,"  a  concept  that  the  Civil  Aeronautics  Board  itself 
discredited  as  a  workable  feature  of  the  current  air  trans- 
port system  in  its  decision  in  Phase  9  of  the  Domestic 
Passenger  Fare  Investigation.   ATA  resurrects  this  argument 
m  the  context  of  an  extremely  sophisticated  simulation  of 
what  purports  to  be  the  current  air  transport  network. 
However,  as  I  will  explain,  the  system  being  simulated  is 
not  the  current  air  transport  system  but  one  which  the 
Congress  discarded  as  an  option  when  it  passed  the  Civil 
Aeronautics  Act  of  1938. 

The  system  being  simulated  is  one  in  which  there 
is  a  single  monopoly  airline,  subject  to  price  regulation 
by  the  Civil  Aeronautics  Board,  free  to  pick  and  choose 
which  routes  to  enter  and  exit,  and  totally  protected  from 


396 


-  2 


entr>'  by  any  other  competitor.   The  model  indicates  that 
this  monopolist,  if  free  to  maximize  his  dollar  profits 
at  this  fixed  fare  level,  will  do  so  by  dropping  certain 
routes  entirely  and  by  cutting  back  flights  on  other 
routes,  thereby  raising  his  average  load  factor  substantially. 
The  profits  that  this  monopolist  could  earn  under  such  a 
system  would  indeed  be  enormous  —  approximately  $2  billion 
during  the  simulation  year  (1973)  . 

This  result  is  by  no  means  a  novel  one.   The 
analytical  proof  was  demonstrated  in  an  article  by 
Professor  White  of  Princeton  University  titled  "Quality 
Variation  When  Prices  Are  Regulated"   (Bell  Journal, 
Autumn  1972).   In  a  paper  delivered  in  the  Fall  of  1972 
at  a  Brookings  Conference,  I  presented  evidence  to  confirm 
the  proposition  that  load  factors  in  monopoly  markets  are 
indeed  higher  than  load  factors  in  competitive  markets 
provided  prices  are  regulated  but  scheduling  is  not.   The 
ATA  simulation  provides  an  indication  of  what  the  magnitude 
of  such  a  load  factor  increase  might  be  in  such  an  idealized 
system  and  how  profi^^able  the  monopolist  would  find  this 
state  of  affairs.   It  conclusively  demonstrates  that  such 
a  scheme  of  regulation  —  monopoly  with  prices  regulated, 
entry  (save  for  the  monopolist)  blockaded,  and  exit  by  the 
monopolist  totally  free  —  is  undesirable  public  policy. 

The  simulation  also  shows  the  potential  magnitude 
of  the  profits  that  might  be  available  to  support  cross- 
subsidization  by  such  a  monopolist  —  approximately  $1.6 
billion  —  in  the  event  that  the  CAB  could  indeed  force 
him  to  serve  routes  that  the  model  indicates  are  in  some 
sense  unprofitable.   (I  would  note  that  the  apparent 
unprof itability  of  many  routes  is  an  artifact  of  the 
simulation.   More  on  this  below.)   However,  as  the  CAB 
found  in  the  recent  New  England  Service  Investigation, 
neither  the  Board  nor  any  other  regulatory  agency  can 
compel  an  unwilling  carrier  to  provide  adequate,  responsive, 
efficient,  money-losing  service  where  the  carrier  can 
effectively  lower  its  costs  by  degrading  the  quality  of 
the  service  (See  Board  Order  74-7-70,  pp.  10-11).   The 
entire  history  of  the  local  service  airline  subsidy  program 
and  the  experience  of  rail  passenger  service  in  this  country 
over  the  last  half-century  provides  ample  additional  evidence 
of  the  validity  of  this  finding. 


397 


This  is  what  the  simulation  is.   What  is  it  not? 
Most  specifically,  it  is  not  a  simulation  of  the  airline 
system  we  have  in  the  United  States  at  this  time.   Indeed, 
the  closest  domestic  analog  would  appear  to  be  the  Bell 
System.   The  FCC,  therefore,  might  find  the  model  useful 
in  its  struggle  to  understand  the  consequences  of  allowing 
competition  in  this  system.   However,  this  Nation's  airline 
system  is  not  a  monopoly,  but  is  composed  of  many  carriers. 
The  CAB  regulates  maximum  and  minimum  fares,  controls 
entry  into  new  city-pair  markets  and  exit  from  these  city- 
pair  markets.   With  regard  to  entry  and  exit,  however, 
the  cab's  effective  authority  over  nonstop  service  in 
city-pair  markets  is  quite  limited.   Carriers  currently 
have  —  and  exercise  --  a  great  deal  of  freedom  to  enter 
or  exit  from  a  large  variety  of  markets  under  the  broad 
authority  conferred  upon  them  by  their  operating  certifi- 
cates.  Furthermore,  since  the  Board  cannot  control  the 
number  of  flights  a  carrier  offers  in  a  particular  city- 
pair  market,  carriers  are  free  to  reduce  schedules  sub- 
stantially from  their  current  levels  without  Board 
approval.   The  fact  that  they  currently  operate  what, 
according  to  the  model,  are  vast  numbers  of  unprofitable 
flights  and  routes  —  not  because  of  CAB  compulsion  but 
because  they  find  it  is  in  their  best  economic  interest 
to  do  so  —  only  casts  further  doubt  upon  the  credibility 
of  the  ATA  results. 

We  have  it  on  the  word  of  the  CAB  (see  its 
Phase  9  opinion  in  the  Domestic  Passenger  Fare  Investigation) 
that  this  scheduling  competition,  given  fixed  price,  tends 
substantially  to  eliminate  excess  profits  on  competitive 
routes  by  driving  load  factors  down  to  the  breakeven  level 
(where  breakeven  is  defined  to  include  a  normal  rate  of 
return).   Certain  major  carriers  --  principally,  TWA, 
American,  and  United  --  have  argued  that  this  scheduling 
competition  is  so  fierce  that  it  does  more  than  eliminate 
excess  profits  on  these  competitive  routes.   According  to 
these  carriers,  such  practices  produce  actual  losses 
absent  capacity  agreements  which  would  control  this  level 
of  competition.   A  CAB  Administrative  Law  Judge  recently 
found  this  latter  contention  to  be  contrary  to  fact  in 
ruling  against  such  agreements.   (See  Initial  Decision 
of  Administrative  Law  Judge  E.  Robert  Seaver,  Capacity 
Reduction  Agreements  Case,  Docket  22908,  served  November  18, 
1974.) 


398 


4  - 


The  crucial  point  to  understand  is  that  if 
scheduling  competition  tends  sharply  to  limit  the  level 
of  excess  profits  that  a  competitive  airline  system 
generates,  the  ability  of  this  system  to  support  a  large 
amount  of  unprofitable  service  is  substantially  impaired. 
Thus,  the  ability  of  the  airline  industry  to  operate  in 
a  competitive  environment  —  competitive  as  to  schedules, 
at  least  —  while  avoiding  the  staggering  level  of  losses 
that  the  ATA  simulation  predicts  should  today  be  occurring 
demonstrates  conclusively  that  the  simulation  is  faulty 
both  as  a  description  of  current  reality  and  as  a  predic- 
tion of  future  behavior. 

What  of  the  apparently  "unprofitable"  routes 
and  flights  that  the  model  finds?   I  would  suggest  that, 
given  the  way  the  current  domestic  air  transport  system 
actually  operates,  these  are  more  likely  artifacts  of  the 
simulation  than  reflections  of  reality.   In  performing 
any  simulation  of  this  sort,  the  designer  of  the  model 
must  make  many  simplifying  assumptions.   In  the  real  world, 
many  costs  are  common  to  more  than  one  flight  or  more  than 
one  route,  yet  the  simulation  demands  that  an  artificial 
allocation  be  made.   Furthermore,  certain  routes  generate 
traffic  for  the  system  as  a  whole,  yet  no  means  exists  to 
properly  allocate  the  revenues  produced  by  this  traffic 
to  these  routes.   Thus,  certain  routes  appear  to  be  more 
profitable  than  they  are  in  reality;  others  appear  to  be 
losing  money  when  they,  in  fact,  are  not.   This  is  not 
the  fault  of  the  simulation  —  arbitrary  assumptions  are 
necessary  if  the  simulation  is  to  be  made  to  work.   But 
that  is  why  we  call  the  exercise  a  "simulation."   A 
knowledgeable  airline  scheduler  familiar  with  the  opera- 
tional characteristics  of  his  particular  system  would 
recognize  these  anomolies  and  disregard  them.   A  person 
unfamiliar  with  the  system  —  or  a  computer  mechanically 
adding  up  "profits"  and  "losses"  —  will  not.   That  is 
why  in  the  real  world,  airline  scheduling  is  performed  not 
by  computers  employing  simulation  models,  but  by  skilled 
and  experienced  men  who  use  such  tools  as  computers  and 
simulation  models  merely  as  initial  inputs  into  the  process. 

This  is  not  to  say  that  all  the  loss  markets 
and  flights  indicated  by  the  ATA  simulation  are,  in  reality, 
profitable.   Under  a  less  regulated  system  where  both  entry 
and  exit  were  freer,  certain  flights  and  certain  cities 
would  be  dropped  by  the  carriers  currently  providing  them. 
After  all,  the  current  route  system  is  a  somewhat  crazy 
patchwork  that  originated  in  the  days  when  the  DC-3  was 


399 


the  Nation's  largest  and  most  efficient  airliner.   This 
is  not  to  say,  however,  that  all  these  cities  that  would 
be  dropped  would  lose  all  airline  service.   Certain  nonstop 
flights  would  be  downgraded  to  one-stop.   Certain  routes 
would  fit  better  into  the  route  systems  of  carriers  other 
than  those  currently  providing  service  over  them.   Certain 
others  would  be  picked  up  by  commuter  carriers  whose 
specialized  operations  and  smaller  aircraft  allow  them 
to  tailor  service  closely  to  the  needs  of  the  small 
communities . 

But  when  all  this  had  happened,  some  city-pairs 
would  indeed  have  service  reduced  and  others  might  well 
lose  all  service.   However,  this  would  not  occur  because 
of  the  elimination  of  cross-subsidy  —  cross-subsidy  does 
not  now  exist  to  any  substantial  degree  —  but  would 
result  from  a  bidding  down  of  fares.   As  fares  fell,  the 
breakeven  load  factors  would  increase.   As  the  CAB  found 
in  Phase  6B  of  the  Domestic  Passenger  Fare  Investigation, 
this  vtpuld  induce  carriers  to  reduce  the  number  of  flights 
they  offer,  thereby  raising  actual  load  factors.   In  some 
cases,  this  new  higher  breakeven  factor  might  be  unsustain- 
ahly   high,  rendering  nonstop  service  on  that  particular 
segment  impossible.   In  this  latter  case,  if  it  were 
determined  that  the  public  interest  demanded  a  continuation 
of  service,  public  subsidies  should  be  voted.   These  subsidies 
would,  however,  need  to  be  nowhere  near  the  one  billion  dollars 
per  year  level  mentioned  by  the  ATA  document. 


400 


eXECUTIVE  OFFICE    OF  THE  PRESIDENT 

COUNCIL  ON  WAGE  AND  PRICE  STABILITY 

WASHINGTON.  D.C.    20506 


May  1,  1975 


MEMORANDUM  FOR:     Albert  Rees,  Director,  Council  on 
Wage  sind  Price  Stability 

FROM:  George  Eads,  Assistant  Director    px.- 

Government  Operations  and  Research  ' 

SUBJECT:  Further  Analysis  of  the  ATA  Simulation 

Model:   "Consequences  of  Regulation  of 
Scheduled  Air  Transport  Industry" 


Since  sending  you  my  memorandum  of  April  29,  I 
have  continued  to  analyze  the  ATA  simulation  results  in 
more  detail.   In  particular,  I  have  had  my  staff  focus  on 
the  results  as  they  apply  to  one  state  —  Arizona.   I  made 
this  choice  because,  having  grown  up  in  Arizona,  I  am  quite 
familiar  with  the  pattern  of  air  service  that  exists  there. 

Figure  1  is  taken  frcsn  the  ATA  report  and  shows 
the  routes  which  would  "lose"  service  under  "deregulation." 
Table  1  shows  the  reduction  in  service  predicted  by  the 
model  on  those  Arizona  routes  that  would  be  retained. 

The  first  thing  that  should  be  noted  about 
Figure  1  is  that  it  includes  (as  do  all  of  the  ATA  state 
maps)  the  subsidized  services  currently  provided  by  the 
regional  (i..e. ,  "local  service")  carriers.   The  implica- 
tion is  conveyed  that  these  services  would  be  lost  under 
■deregulation."   This  is  clearly  a  false  issue  calculated 
to  raise  scare  headlines.   We  have  made  it  very  clear  that 
amy  Administration  bill  will  not  propose  an  end  to  the 
current  subsidy  program.   This  is  not  to  say  that  con- 
siderable improvement  could  not  be  made  in  the  program. 
Both  the  CAB  (in  its  study  Service  To  S^.all  Communities) 
and  I  (in  my  Brookings  book  The  Local  Service  Airline 
Experiment)  have  shown  how  better  service  could  be  provided 
at  lower  cost  to  the  Government  by  major  changes  in  the 
way  the  current  subsidy  program  is  run.   The  relevant 
point,  however,  is  that  none  of  this  service  will  be  in 
any  danger  from  "deregulation." 


401 


51-146   O  -  76  -  pt.  1 


402 


Ubie  I 


COMPARISON  OF  NON-STOP  SCHEDULED  SERVICES 
1973  Actual  vs.  Simulated  for  Profit  Maximization 


Fli^ta  Per  Day  -  Both  Directions 


NOTE:       This  comparison  does  not  include  city- pairs  in  which  profit 
maximization  would  result  in  no  service,  and  it  does  not 
indicate  the  public  service  consequences  of  elimination  of 
adequate  frequencies  to  meet  peak  demand. 


Average  Daily  Services  Ar.signed 
Non-Stop  at 

Services  Maximum  Earnings 

(1973  Actual)  (Simulation) 


ARIZONA 
Between: 
Fboenix 


and: 

-  Albuquerque,  N. M.  4 

-  AmarUlo,  Texas  2 

-  Chicago,  m.  18 
.  Dallas.  Texas  17 

-  Denver.  Colo.  18 

-  El  Paso,  Texas  4 

-  Houston.  Texas  1 

-  Kansas  City,  Mo.  3 

-  Las  Vegas.  Nev,  14 

-  Loa  Angeles,  Calif,  29 
-    -  Minneapolis/St.   Paul,   Minn.        2 

-  New  York,  N.Y.  6 

-  Oklahoma  City,  Okla.  4 

-  Portland.  Ore.  2 

-  St.  Louis,  Mo.  7 

-  San  Antonio,  Texas  2 

-  San  Francisco.  Calif.  9 

-  Washington.  D.C.  4 


and: 

-  Chicago,  m. 

9 

-  Dallas.  Texas 

8 

. .  -  Loa  Angeles.  Calif. 

10 

-  San  Francisco.  Calif. 

4 

403 


This  leaves  seven  routes  that  are  identified 
as  "unprofitable."   These  are  Phoenix-Palm  Springs, 
Phoenix-San  Diego,  Phoenix-Tucson,  Tucson-El  Paso, 
Tucson-Kansas  City,  Tucson-Palm  Springs,  and  Tucson- 
San  Diego. 

I  have  directed  Roger  Mallet  to  examine  the 
pattern  of  air  service  that  these  routes  received 
during  July  1973,  the  mid-point  of  the  year  the  ATA 
chose  to  simulate.   Appendix  A  lists  all  flights  in 
both  directions  together  with  the  flight  itineraries. 

As  you  can  see,  with  only  one  exception  (American 
Airlines  Flight  374  from  Tucson  to  San  Diego) ,  all 
flights  offered  during  July  1973  were  segments  of 
longer  flights.   They  are  thus,  subject  to  the  cost  and 
revenue  allocation  problems  I  mentioned  in  my  memo  of 
April  29.   This  means  that  any  indication  by  the  model 
of  "unprof itability"  needs  to  be  examined  very  carefully. 

Let  us  focus  particularly  on  the  Tucson-Phoenix 
segment.   During  July  1973  there  were  18  flights  per  day 
between  Phoenix  and  Tucson  and  17  flights  per  day  between 
Tucson  and  Phoenix.   (These  totals  do  not  include  four 
daily  nonstop  flights  in  each  direction  by  an  unsub- 
sidized  commuter  carrier  which  has  total  freedom  to 
enter  and  exit  the  market  at  will.)   All  of  those  35 
daily  flights  were  offered  as  segments  of  longer  flights. 
In  many  cases,  these  flights  clearly  were  "feed"  flights. 
For  example,  American  Airlines  Flight  177,  Boston- 
New  York/JFK-Phoenix-Tucson  is  clearly  operated  as  a 
means  of  providing  single-plane  service  to  both  cities 
from  the  East  Coast.   It  is  no  more  run  by  American 
solely  because  of  its  Phoenix-Tucson  segment  than  it 
is  because  of  its  Boston-New  York  segment  (which  I  am 
certain  is  "unprofitable"  judged  by  itself) . 

This  example  reflects  the  fact  that  airlines 
do  not  schedule  flights  on  a  city-pair  basis.   They  are 
scheduled   on  a  total  flight  basis.   That  is,  what  the 
scheduler  tries  to  achieve  is  a  situation  in  which  the 
revenues  attributable  to  a  particular  flight  equal   or 
exceed   the  costs  attributable  to  that  flight.   In 
deciding  whether  or  not  to  include  a  particular  segment 
(e.g.,  Tucson-El  Paso  segment  on  American's  Flight  116 
wTtn  an  itinerary  consisting  of  San  Francisco-Phoenix- 
Tucson-El  Paso-Chicago-Newark) ,  the  scheduler  decides 


404 


-  3 


what  additional  traffic  he  can  pick  up  by  including 
the  segment  (he  doesn't  particularly  care  whether  this 
is  local  Tucson-El  Paso  traffic  or  whether  it  travels 
beyond  El  Paso  —  it  is  the  revenue  he  is  concerned 
about)  and  what  additional  costs  American  will  incur 
by  serving  the  segment.   This  additional  cost  may  or 
may  not  be  related  to  what  the  CAB  terms  "direct 
operating  expense."   "Direct  operating  expense"  is 
merely  an  accounting  convention.   If  attributable 
revenues  exceed  attributable  costs,  the  segment  is 
included.   If  not,  it  is  deleted. 

Deleting  such  a  segment  on  a  given  flight 
would  only  require  CAB  approval  if  it  represented  the 
carrier's  only  service  at  either  of  the  two  cities 
under  authority  of  a  given  "route  segment."   It  is 
important  to  note  that  CAB  approval  often  is  not 
required  either  to  add  the  first  nonstop  or  delete  the 
last  nonstop  in  a  given  city-pair  market.   For  example, 
nothing  in  American  Airlines'  certificate  currently 
compels  it  to  offer  nonstop  service  in  any  of  the 
Arizona  city-pairs  mentioned  in  the  ATA  simulation. 
Indeed,  during  July  1973,  American  eliminated,  without 
seeking  CAB  approval,  the  Palm  Springs  segments  from 
Flights  159,  221,  and  622,  thus  ending  nonstop  service 
by  American  between  Palm  Springs,  on  the  one  hand,  and 
Phoenix  and  Tucson,  on  the  other. 

To  see  how  widespread  this  carrier  authority  to 
add  and  delete  service  currently  is,  I  had  Mike  Roach 
check  the  certificates  of  the  carriers  serving  the  Arizona 
markets.   He  informs  me  that,  perhaps  with  the  single  ex- 
ception of  Frontier's  Phoenix-Tucson  service,  the  carriers 
involved  are  currently  free  to  terminate  service  over  all 
the  indicated  segments.   In  other  words,  American,  under 
its  current  certificate,  has  no  obligation  to  provide 
service  in  any  of  the  six  city-pairs  where  it  currently 
is  certificated  (it  does  not  hold  a  certificate  allowing 
it  to  fly  between  Kansas  City  and  Tucson) . 

This  brings  me  to  my  final  point  —  service 
reductions  on  segments  that  the  ATA  model  predicts  would 
be  retained.   As  you  can  see,  in  many  cases,  the  hypo- 
thetical reductions  indeed  would  be  massive.   Chicago- 
Phoenix  service  would  be  cut  from  18  to  8  flights  per 
day.   Again  it  is  vital  to  be  clear  about  what  is  and 
is  not  being  simulated  by  the  ATA  model.   As  I  indicated 


405 


4  - 


in  my  April  29  memo,  the  ATA  model  simulates  the 
response  of  a  monopolist.   I  am  not  surprised  that  a 
monopolist,  if  free  to  drop  all  flights  he  didn't 
wish  to  offer,  and  protected  from  entry  by  other  car- 
riers, would  choose  substantially  to  curtail  service. 
He  might  even  drop  the  amount  of  service  that  the  ATA 
model  indicates. 

However,  the  current  air  transport  system  is 
not  a  monopoly.   It  is  a  competitive  system  where 
carriers  face  controlled  prices,  are  free  to  determine 
the  amount  of  service  they  wish  to  provide  at  these 
controlled  prices,  and  are  even  free  to  exit  from  many 
city-pairs  without  explicit  permission  of  the  CAB  if 
they  find  their  operations  unprofitable.   The  fact 
that  they  currently  choose  to  operate  large  numbers 
of  flights  and  routes  which  the  simulation  indicates 
are  "unprofitable"  indicates  not  that  there  is  cross- 
subsidization  in  the  system,  but  that  the  simulation 
is  faulty  in  the  way  it  determines  whether  a  particular 
route  or  flight  if  "profitable"  or  "unprofitable." 


406 


^-t^ 


tai=^^ 


— I — • — ' r— e — I    .'    X  \\    .1    <-^ 


r 


r^f^^^ 


'^?s¥^ 


Is-^ 


^3 


407 


408 


409 


Mtiiii 


i?J  |5i  N 


410 


MEMORANDUM 


To:      Honorable  Edward  M.  Kennedy,  Chairman 

Subcommittee  on  Administrative  Practice  and  Procedure 
United  States  Senate 

From:     Dr.  John  W.  Drake,  Professor  of  Air  Transportation 
School  of  Aeronautics  and  Astronautics 
Purdue  University 
West  Lafayette,  Indiana  47907 

Subject:  Comments  re:  A.T.A.  study  of  Consequences  of  Deregulation 
of  the  Scheduled  Air  Transport  Industry 

Date:     15  May  1975 


Summary 

The  ATA  model  misapplies  costs  In  such  a  way  as  to 
make  more  segments  appear  unprofitable. 

The  ATA  model  probably  understates  short  and  thinly 
travelled  segment  yields,  thus  making  more  appear 
unprofitable. 

The  ATA  model  leaves  out  all  aircraft  less  expen- 
sive to  operate  than  a  DC-9-10,  thus  making  more 
segments  appear  unprofitable. 

The  $50  billion  spent  on  the  Interstate  system  has 
Indeed  succeeded  in  providing  superior  alternative 
service  over  many  of  the  segments  enumerated.  This 
should  not  be  viewed  as  a  catastrophe. 

The  model  used  is  very  questionable  for  this  appli- 
cation, for  both  reasons  of  oversimpl iflcation  and 
for  more  fundamental  reasons  of  methodology. 


DRAKE        •        TRAN«POnTATION  CONaULTANT 


411 


Introduction 

The  ATA  study  referred  to  concern*,  the  application  of  a  model  to  the 
question  of  profitability  of  Individual  segments  of  the  airline  route 
network  of  the  United  States.  There  are  a  host  of  questions  one  may  a'.k 
about  any  such  study,  many  of  which  get  Involved  with  fine  points  which 
do  not.  In  fact,  matter  too  much.  The  Important  thing  therefore  Is  to 
try  to  address  the  Important  questions.  These  seern  to  me  to  be  (more  or 
less  1n  order) : 

•  Does  the  simulation,  as  run,  use  reasonably  good 
cost  data? 

•  Does  the  simulation,  a',  run,  use  reasonably  good 
revenue  data? 

•  May  the  simulation  method  used  be  expected  to 
t1ve  the  answers  It  proports  to  give  (I.e., 
reasonably  credible  answers  re.  probable  route 
abandonments)? 

My  belief  concerning  these  questions  Is,  briefly:  "No,"  "Perhaps," 

and  "No." 

Analysis 

Basically  the  simulation  steps  flights  into  the  network  on  a  segment 
by  segment  basis  and  computes  proported  costs  of  flying  and  revenue  from 
the  services  offered.  The  difference,  profit i  is  used  to  determine 
whether  to  add  a  flight  and  where  te  add  It,  and  thus  what  and  how 
many  routes  are  candidates  for  abandonment.  Being  a  difference  between 
two  "i^r^   nearly  equal  numbers  the  profit  criterion  is  much  more  sensitive 
to  errors  in  either  the  cost  or  revenue  estimates  than  they  are  them- 
selves. Thus  the  distinct  Interest  1n  whether  or  not  the  cost  or  revenue 

JOHN   W.   O^^JUM.        •         TnAr^aPOKTATIOM  COr4SUl.TA^4r 


412 


assumptions  used  are  to  be  relied  upon,  since  either  overly  high  costs 
or  overly  low  revenues  will  quickly  turn  routes  from  profit  to  loss. 

Costs 

If  all  costs  of  operating  were  proportional  to  the  number  of 
passengers  carried  or  flights  flown,  airline  route  analysis  would  be 
a  vastly  simplified  matter.  However,  as  in  many  businesses,  costs  are 
very  much  a  mixture  of  fixed  and  variable.  Furthermore  what  is  fixed  in 
the  short  run  may,  sometimes,  be  variable  in  the  long  run.  In  addition, 
fixed  costs  are  fixed  on  a  number  of  levels  themselves.*  The  ATA  in  its 


*J.E.D.  Williams  in  his  excellent  book  "The  Operation  of  Airliners" 
(Hutchinson  Scientific  &  Technical ,  London,  1964)  divides  costs  as  follows 
in  his  Chapter  12,  "The  Anatomy  of  Operational  Costs": 

Operator's  Overheads,  A.  Those  costs  which  would  be  incurred 
whether  the  particular  fleet  under  discussion  existed  or  not. 

Fleet  Overheads,  B.  The  costs  necessarily  incurred  by  having 
the  particular  fleet,  whatever  its  size  and  whether  used  or  not. 

Aircraft  Fixed  Costs,  C.  The  marginal  cost  of  having  one 
extra  aircraft  "in  the  fleet  whether  used  or  not. 

Station  Fixed  Costs,  D.  The  cost  of  maintaining  the  basic 
establishment  of  personnel  and  facility  at  a  station. 

Sector  Costs,  E.  Those  marginal  costs  of  operating  one  flight 
on  a  sector  which  are  independent  of  how  the  flight  is  operated. 

Hourly  Costs,  F.  Those  marginal  costs  of  flying  the  aircraft 
for  one  hour  which  are  independent  of  how  the  aircraft  is  flown. 
Hourly  costs  per  flight  are  computed  on  the  basis  of  block  time, 
i.e.,  from  the  start  of  taxiing  out  to  the  end  of  taxiing  in. 

Passenger-hour  Costs,  G.  The  costs  of  providing  a  passenger 
with  service  for  one  hour  not  otherwise  incurred.  For  some  purposes 
it  is  convenient  to  consider  passenger-hour  costs  as  a  charge  on 
revenue. 

Fuel  and  Oil ,  H.  The  cost  of  fuel  and  oil  loaded  at  the 
refueling  point.  Fuel  is  bought  by  the  gallon  and  metered  by  the 
pound,  and  produced  thrust  by  the  B.T.U.  For  many  purposes  (but 
not,  for  example,  selection  of  minimum-cost  cruise)  fuel  and  oil 
costs  may  be  considered  a  part  of  the  hourly  variable  cost  F. 

(continued) 


JOHN  W.   DRAKE        •        TRANSPORTATION  CONSULTANT 


413 


study  treated  costs  in  a  very  unrealistic  manner.  As  explained  on  page 
4,  "marginal"  costs  were  used  to  select  the  flight  to  be  added  but  then 

"after  each  flight  addition  is  made total  operating  costs  are 

adjusted  to  include  the  additional  system  costs*  [to  produce  fully  allo- 
cated costs]."  This  prorating  of  fixed  costs  of  all  kinds  over  the 
variables  of  all  kinds  on  a  percentage  basis  will  permit  the  model  to 
make  incremental  decisions  in  a  way  which  is  quite  removed  from  reality. 
For  example,  it  may  in  effect  by  "paying  for"  10%  or  129%  of  a  DC-9 
maintenance  base  when  as  a  matter  of  fact  for  many  of  the  items  which 
make  up  such  a  base  you  simply  have  one  or  you  don't,  thus  producing  a 
large  fixed  and  lower  variable  cost.  Rather  than  being  added  prorata, 
major  portions  of  the  fixed  costs  whould  be  treated  by  the  model  simply 
as  they  are:  fixed,  by  system,  fleet,  station,  etc.  This  leads  to  very 
much  lower  marginal  costs  and  a  sort  of  "steady  by  jerks"  behavior  of 


Charges  on  Revenue.  Certain  costs  such  as  the  agent's  cormiis- 
sion  are  necessarily  incurred  by  the  act  of  selling  a  ticket.  For 
the  purposes  of  aircraft  operational  studies  these  can  conveniently 
be  regarded  as  a  charge  on  revenue.  Reference  in  this  book  is 
always  to  net  revenue,  that  is,  the  residual  revenue  after  deduction 
of  items  under  this  heading. 

The  advantage  of  this  classification  is  that  if  values  are 
assigned  to  A,  B,  C,  D,  E,  F,  G  and  H  it  is  possible  to  see 
precisely  how  changes  in  the  operation,  such  as  fleet-size,  schedule, 
route-structure,  load  factor,  operating  technique,  etc.,  affect  the 
economy  of  operation.  The  snag  is  the  difficulty  of  assigning 
costs  under  these  headings,  but  this  analysis  must  nevertheless  be 
undertaken  if  the  operator  is  to  ensure  that  the  operating  posture 
is  at  maximum  profitability. 

*fixed  costs 

i.e.,  a  big  "jerk"  when  one  goes  to  two  DC-9  maintenance  bases,  opens  a 
new  station,  or  buys  a  new  type  of  equipment. 


JOHN  W.   DRAKE        •        TRANSPORTATION  CONSULTANT 


414 


a  substantial  fixed  cost  and  immediately  pour  flights  into  the  most 
profitable  routes.  However,  once  that  were  done  it  would  \ye   created 
much  of  its  infrastructure  and  would  find  it  profitable  to  keep  adding 
flights  on  an  incremental  basis  in  a  manner  very  different  than  the  way 
the  model  used  in  the  ATA  study  does  in  its  phase  1.*  It  would  add  more 
until  it  came  to  a  step  in  the  fixed  costs  and  then  hesitate  until 
traffic  pressure  built  up.  A  good  many  of  the  "more"  would,  it  seems  to 
me,  be  on  the  routes  the  ATA  suggests  are  threatened,  albeit  mostly 
between  cities  each  of  which  already  had  a  station  (and  thus  many  fixed 
costs). 

If  one  were  simulating  competitive  practice  it  would  mean  that,  in 
the  above  example,  the  stations  would  need  to  be  of  the  same  carrier 
(although  interchange  flights  could  be  used  as  well  as  other  techniques). 
The  most  important  thing  however  is  that  in  a  competitive  environment 
everyone's  fixed  cost  steps  are  not  identical  in  time  and  place.  One 
carrier  may  be  reluctant  to  add  a  flight  of  a  certain  kind  but  another 
carrier  which  has  just  bought  the  right  aircraft  type  may  well  be  anxious 
to  do  so. 

In  sum,  I  believe  the  treatment  of  costs  in  the  first  phase  of  the 
model  used  (the  fully  allocated  cost  phase)  greatly  distorts  the  models 
process  of  adding  flights,^  and  does  so  because  of  the  model's  demand/ 
frequency  assumption,   in  the  direction  of  concentrating  flights  in  the 


♦i.e.,  as  shown  in  Figure  2  page  4  of  the  ATA  study  and  expanded  upon  in 
the  Lockheed  brochure  CTR  2007,  Lockheed  Airline  System  Simulation, 
revised  May  1970,  charts  884-09229  through  886-09229. 

"•"ibid.,  Lockheed  chart  889-05180. 

*^^One  may  ask  why  this  was  done.  I  believe  there  are  a  number  of  reasons 

JOHN  W.   DRAKE        •        TRANSPORTATION  CONSULTANT 


415 


major  markets.* 

Revenues 

Revenues  are  less  clear.  Individual  segment-by-segment  coach  fares 
were  used.  They  were  then  reduced  by  a  constant  percentage  to  reflect 
recent  system-wide  average  discount  experience.  Thus  short  haul  flights 
and  lightly  travelled  segments  were  discounted  to  the  same  degree  as  long 
haul  and  dense  segments.  I  do  not  have  data  immediately  at  hand  from 
which  to  analyze  discounts  including  the  effect  of  the  fare  pro-rate  on 
joint  fare  routings  by  segment  type;  however,  a  few  observations  are 
obvious. 

1.  By  Trunk  Carrier,  in  1969,  there  is  a  recognizable 
tendency  toward  less  discounting  in  shorter  hauls  based 

on  comparing  each  carrier's  %   Full  Fare  revenue  from  the  DPFI 
Phase  5  Decision,  Appendix  B,  with  the  coach  lengths  of 
haul ,  Appendix  L. 

2.  Many  of  the  present  day  (1975)  discount  fares  do  not 
apply  on  thin  routes  (e.g.,  no  TGC  from  IND->SEA)  nor 
on  short  routes  (e.g.,  no  Bicentennial  below  750  miles, 

no  demand  scheduling  below  very  long  haul). 


but  in  this  case  it  is  most  probably  a  combination  of  the  background 
of  the  modelers  (technical  more  than  economic)  and  the  state  of  the  art 
when  the  model  was  begun  (ca.  1959).  For  further  discussion  of  the 
problems  associated  with  models  not  doing  what  decision  makers  want 
models  to  do,  see  my  book:  The  Administration  of  Transportation  Model- 
ing Projects,  D.  C.  Heath,  Lexington,  Mass. ,  1973. 

*I  do  not  wish  to  suggest  that  I  propose  the  modifications  I  have  sug- 
gested as  all  that  is  needed  to  perfect  the.model  under  discussion.  I 
recognize  full  well,  for  example,  that  if  my  modifications  were  made 
one  could  get  vastly  different  answers  if  you  ran  the  model  from  zero 
frequencies  upwards  and  from  many  frequencies  downwards.  It  would  be 
more  realistic,  however,  as  this  is  exactly  what  happens  in  real  life. 
In  truth,  I  favor  a  mathematical  programming  approach  using  origin  and 
destination  data  rather  than  segment  flow  data.  Such  a  model  would 
break  the  perpetuation  of  the  present  route  structure  just  because  it 
is  the  present  route  structure.  Such  a  mathematical  programming 
approach  is  now  just  within  the  state  of  the  art,  I  believe.  See  the 
discussion  later  in  this  memo. 


JOHN  W.   DRAKE        .        TRANSPORTATION  CONSULTANT 


416 


Thus,  given  a  choice,  I  would  have  to  guess  that  the  ATA  underesti- 
mated the  "endangered"  segment  actual  gields.  The  prorate  situation  is 
more  of  an  unknown,  however,  so  to  be  certain  one  must  have  the  real 
data. 

Aircraft  Types 

Clearly  another  way  in  which  the  ATA  study  suggested  such  a  large 
number  of  endangered  segments  was  by  its  choice  of  equipment.  The  list 
on  page  3  is  long  enough  but  not  diverse  enough: 

ATA  Possible 

B-747  *  B-747 

L-lOll/DC-10  *  L-lOll/DC-10 

DC-8-61  *  DC-8-61 

B-707-300B/DC-8  B-707-300B/DC-8-50 

B-727-200  *  B-727-200 

DC-9-30/B-737  *  DC-9-30/B-737 

DC-9-10  DC-9-10  (?) 

*  Convair  580 

*  FH-227B 

Allegheny  Conversion  of 
Nord  262  (Mohawk  298) 

*  DHC-7 
Short  SC-30 

*  Fairchild/Schwearingen 
Metroliner 

Clearly  not  all  need  to  be  included--perhaps  only  the  asterisked 

ones.  Running  time  would  go  up  slightly  but  I  dare  say  some  endangered 

segments  would  suddenly  survive,  which  leads  "VoiU!"  to  the  third  level 

carriers  and  their  willingness  to  step  in.  To  be  sure,  as  the  ATA  says, 

Lafayette,  Indiana, (where  I  write  this)-Chicago  service  by  Allegheny  is 


TRANSPORTATION  CONeULTANT 


417 


endangered.  It's  so  endangered  it's  been  gone  for  well  over  a  year. 
But  we  have  eight  (weekday)  non-stops  to  Chicago  on  fast  pressurized 
Air  Wisconsin  planes.  Who  is  suffering? 

Interstate  Highways 

One  must  also  not  lose  sight  of  another  factor:  the  interstate 
highway  system.  I  will  use  Indiana  as  an  example  since  I  now  reside 
there  and  travel  extensively.  I  reproduce  the  map  from  the  ATA  study 
and  the  same  map  with  the  interstate  highways  added.  Having  now  spent 
something  approaching  $50,000,000,000  to  build  a  vast  system  of  inter- 
state highways,  is  it  any  wonder  that  Indianapolis  -  Fort  Wayne  service 
might  be  threatened,  and  so  should  a  lot  of  the  others?  We  should  not 
cry  if  we  sometimes  succeed  in  transportation!  This  does  point  to  the 
most  important  of  all  aspects  of  this  whole  deregulation  questions, 
however,  which  is  simply  that  of  "What  is  our  national  transportation 
policy?"  As  of  now  we  don't  have  one.  We  need  one.  Otherwise  we  are 
in  the  silly  situation  of  crying  over  things  that  either  won't  happen  or 
that  we've  spent  billions  trying  to  get  to  happen.*  With  no  integrated 
intermodal  transportation  policy,  we  don't  know  when  we  are  well  off! 

Model  Methodology 

One  must  still  address  the  question  of  whether  the  model  used  is 
fundamentally  appropriate  to  the  problem.  That  is,  if  it  were  merely 
improved  and  had  everybody's  nit-picking  objections  taken  care  of  and 
computer  time  were  no  object,  could  it  do  the  desired  job  in  this 


*0r  in  the  case  of  the  trains,  happened  when  we  didn't  want  them  to, 
because  of  disjointed  policies  toward  air,  rail,  water  and  highway 
transportation. 


JOHN  W.   DRAKE        •        TRANSPORTATION  CONSULTANT 


51-146   O  -  76  -  pt.  1  -  28 


418 


Map  of 
INDIANA 


ATA  Study  Map  of  Indiana 


JOHN  W.  ORAKB 


.        TRANSPORTATION  CONSULTANT 


419 


Map  of 
INDIANA 


ATA  Study  Map  of  Indiana  with  the  Interstate  Highways  Added 


JOHN  W.  ORAKK        •        TWANi^OWTATION  CONSUI-TANT 


420 


11 


instance?  I  have  hinted  at  the  answer  in  tny  earlier  footnote  (see  page 
7  at  the  end  of  the  costs  section).  Let  me  reiterate  and  expand 
slightly. 

1.  If  the  model  would  realistically  simulate  business 
behavior  by  incrementally  adding  flights  (using  good 
cost  steps,  si i pes,  etc.,  etc.,  etc.),  it  wouldn't 
reproduce  its  results  when  run  backwards,  taking  away 
flights  from  a  vast  superfluity,  but  both  answers  would 
be  equally  valid!  They  would  simply  highlight  a  major 
policy  question:  Should  the  government  still  view  air 
transport  as  an  Infant  industry  needing  a  boost,  or 
not? 

2.  If  one  really  wants  to  see  what  segments  of  a  route 
network  the  U.  S.  ought  to  want  to  have  in  the  interest 
of  maximizing  its  efficient  use  of  resources,  use  of 
the  existing  segment  flow  data  ("service  segment  data" 
from  the  ER  586' s)  is  the  wrong  way  to  go.  A  mathe- 
matical programming  approach  using  origin  and  destina- 
tion data,  though  not  without  problems,  is  a  better 
way.  Ideally  it  should  be  a  mixed-integer  program  but, 
depending  upon  the  time  horizon, that  is  not  as  essential 
as  it  first  appears.  Such  analyses  are  now  within  our 
grasp  and  should  be  done. 


JOHN  W.  DRAKK        •        TRANSPOfrTATION  CONSULTANT 


421 


UNIVERSITY  OF  CM.lKOIiM  A,  lU.Kkl  ,1  .i:V 


"iil 


June  A,    1975 


Senator  Edward  M.  Kennedy 
Chairman,  Subcommittee  on 

Administrative  Practice  and  Procedure 
United  States  Senate 
Washington,  D.C.   20510 

Dear  Senator  Kennedy: 

Please  forgive  my  long  but  unavoidable  delay  in  responding  to  your  letter  of 
April  29,  requesting  an  evaluation  of  the  April  25  letter  of  Dr.  George  James, 
and  on  the  Air  Transport  Association  report  used  to  back  up  the  main  points  in 
that  letter.   The  previous  letters  of  other  economists  have  covered  most  of  the 
Important  weaknesses  of  the  James  letter  and  the  ATA  report,  so  I  shall  limit 
myself  to  a  few  additional  comments . 

As  previous  comments  on  the  ATA  model  have  Indicated,  Its  primary  weakness  is 
that  it  assumes  that  in  the  absence  of  regulation,  the  carriers  in  any  given 
market  would  behave  as  a  single  monopolist,  at  least'/'the  service  quality 
offered.   Thus,  the  report  argues  that  without  regulation,  flights  on  currently 
unprofitable  routes  would  be  abandoned,  and  flights  on  profitable  routes  would 
be  cut  back  to  achieve  maximum  profits. 

This  conclusion  is  not  only  based  on  faulty  analysis  (as  previous  comments  have 
already  pointed  out),  but  also,  the  study  starts  off  with  what  seems  to  me  to 
be  a  totally  mistaken  assumption  about  how  the  CAB  currently  affects  airline 
behavior.   The  study  implicitly  assumes  that  there  is  something  which  the  CAB 
is  doing,  through  exercise  of  Its  legal  powers,  to  prevent  flight  cutbacks  on 
main  routes,  so  as  to  prevent  load  factors  from  rising  to  a  profit-maximizing 
level  (mentioned  to  be  81  per  cent).   And  yet  there  is  nothing  which  the  CAB 
has  done  to  prevent  "profit-maximizing  cutbacks"  in  flights  to  such  a  load  fac- 
tor.  It  does  not  have  to,  because  the  airlines  compete  among  themselves  in 
service  quality,  driving  load  factors  down  until  profits  reach  a  normal  level. 
Why  this  would  change  in  the  absence  of  CAB  regulation  is  never  stated,  either 
by  Dr.  James  or  by  the  report  (antitrust  laws  would  of  course  prevent  collusion 
in  restraint  of  trade  on  the  part  of  the  airlines  in  the  absence  of  regulation. 
Just  as  they  do  now).   It  would  thus  appear  that  the  ATA  study  is  vesting  the 
CAB  with  powers  which  it  does  not  have,  and  which  it  clearly  does  not  need.   As 
a  result,  the  study  is  irrelevant  to  the  question  at  hand. 

The  second  point  which  I  want  to  make  regards  the  empirical  validity  of  the 
results  of  the  ATA  study.   It  asserts  that  if  money-losing  routes  were  abandoned. 


422 


372  routes  would  lose  Crunk  service.   Professor  Peltzman,  In  his  excellent 
comment,  points  out  that  of  these,  there  are  seven  Texas  and  California  routes 
which  currently  receive  service  from  non-subsidized  intrastate  carriers  at 
below-CAB  fares. 

I  count  even  more  such  routes  than  Professor  Peltzman:   in  addition  to  the 
ones  he  mentions  ar§  Fresno-Los  Angeles,  Fresno-San  Francisco,  Stockton- 
San  Francisco,  and  Los  Angeles-Palm  Springs.   Thus,  all  told,  eleven  of  the 
routes  which  the  ATA  report  predicts  would  lose  service  in  the  absence  of  regu- 
lation are  in  fact  being  served  by  non-subsidized  carriers  at  below-CAB  fares . 

Third,  as  any  reference  to  the  Official  Airline  Guide  will  Indicate,  commuter 
carriers  have  served  profitably  many  routes  of  too  low  a  density  for  even  the 
subsidized  local  service  carriers.  Nearly  all  routes  currently  served  by  the 
trunks  are  of  higher  density  than  that.  Thus,  any  town  which  lost  trunk  air 
service  would  be  almost  certain  of  being  served  by  a  nonsubsldized  commuter 
carrier,  and  many  cities  would  stand  a  good  chance  of  being  served  by  a  larger 
carrier  such  as  PSA  or  Southwest  Airlines. 

I  am  most  inclined,  however,  not  to  believe  that  these  routes  are  unprofitable 
in  the  first  place.   As  Dr.  Eads  has  commented  in  his  letter  of  May  1,  the 
trunk  carriers  are  free  to  abandon  service  on  most  of  these  "unprofitable" 
routes,  and  the  fact  that  they  have  not  done  so  indicates  either  that  the 
routes  are  profitable,  or  that  the  managements  of  the  airlines  represented  by 
the  ATA  are  incompetent,  in  failing  to  maximize  profits  given  the  existing 
regulatory  structure.   I  believe  that  the  routes  are  profitable.   To  the  extent, 
then,  that  the  CAB  is  not  currently  requiring  the  airlines  to  provide  as  much 
service  as  they  do  on  these  "unprofitable"  routes,  it  is  difficult  to  see  how 
elimination  of  CAB  regulation  would  have  any  Impact  whatsoever  on  service 
provided.   Again,  the  ATA  report  is  basically  irrelevant  as  regards  the  effects 
of  CAB  regulations. 

To  conclude,  I  think  that  the  ATA  study  is  an  interesting  (if  highly  Inaccurate) 
exercise  to  determine  what  would  happen  if,  by  regulatory  fiat,  one  carrier 
were  granted  a  complete  monopoly  on  every  route  in  the  country.   But  it  has 
little  if  anything  at  all  to  do  with  the  potential  effects  of  deregulation  of 
the  trunk  airline  industry  in  the  United  States. 

Sincerely 


Theodore  E.  Keeler 

Assistant  Professor  of  Economics 


TEK:jst 


423 


UNIVERSITY    OF    CHICAGO 

GRADUATE    SCHOOL    OF   BUSINESS 

5836     GREENWOOD     AVENUE     •     CHICAGO,     ILLINOIS     60637 

May  5,  1975 


Senator  Edward  M.  Kennedy 

Chairman 

U.  S.  Senate  Subcommittee  on  Administrative 

Practice  and  Procedxire 
Senate  Office  Building 
Washington,  D.C.  20510 

Dear  Senator  Kennedy: 

I  am  pleased  to  reply  to  your  request  of  April  29  for  a  review  of  the 
Air  Transport  Association's  study  on  the  possible  consequences  of 
deregulation  of  the  airline  industry. 

In  my  opinion,  the  weaknesses  of  this  study  are  so  glaring  that  the 
study  simply  cannot  support  the  case  the  ATA  wants  to  make.  In  fact, 
if  it  does  anything,  it  strengthens  the  case  for  deregulation. 

The  heart  of  the  study  is  a  list  of  372  nonstop  routes  which  "are  prime 
candidates  for  abandonment  under  deregulation."  One  indicator  of  the 
weakness  of  the  study  is  its  inclusion  among  these  372  routes  of  seven 
Texas  and  California  routes  already  being  served  by  non-CAB- regulated 
carriers  at  below-regulated  rates.  These  are: 

San  Francisco-Sacramento 
San  Francisco-San  Diego 
Los  Angeles- San  Diego 

Dallas-Houston 
Harlingen-Hous  ton 
San  Antonio-Houston 
San  Antonio-Dallas. 

Clearly,  if  unregulated  service  is  already  being  supplied  to  these  markets 
it  is  absurd  to  claim  that  they  will  be  left  without  service  under  deregu- 
lation. Since  the  entry  of  unregulated  carriers  has,  in  virtually  all  these 
markets,  led  to  improved  service,  a  legitimate  question  may  be  raised  against 
the  ATA's  claim  that  extending  deregulation  to  the  remaining  365  markets  will 
lead  to  the  cessation  of  (nonstop)  service  to  them.  Indeed,  if  one  checks 
this  list,  numerous  instances  will  be  found  where  nonstop  service  is  in  fact 
being  provided  by  lightly  regulated  commuter  air  carriers.  I  comment  on  this 
subsequently. 

I  believe  that  the  major  weakness  of  the  study,  and  perhaps  the  primary 
source  of  anomalies  like  those  I  have  Just  cited,  lies  in  its  methodology. 
This  methodology  is  not  described  clearly,  but  it  appears  to  rely  heavily 


424 


on  estimates  of  the  profit  or  loss  engendered  by  the  addition  of  nonstop 
flights  to  specified  city  pairs.   The  defect  of  this  methodology  is  im- 
plicitly recognized  in  the  April  25,  1975  covering  letter  to  you  from 
George  "w.  James,  ATA  Senior  Vice-President—Economics  and  Finance,  in 
which  he  states  that  "it  is  recognized  that  some  [of  the  listed  "unprof- 
itable routes"]  might  be  held  [under  deregulation]  for  such  reasons  as 
feeding  heavier  traveled  routes  or  aircraft  positioning."  This  appears 
to  recognize  that  a  nonstop  route  can  be  profitable  even  if  the  traffic 
generated  on  that  route  alone  could  not  support  nonstop  service.  For 
example,  there  may  be  30  passengers  between  City  1  and  City  3,   and  another 
30  between  intermediate  City  2  and  City  3-   These  may  separately  be  insuf- 
ficient to  warrant  1-3  and  2-3  nonstop  service,  but  may  make  a  1-3  flight 
with  a  stop  at  2  profitable.  Consequently,  the  total  market  involved  can 
support  what  will  show  up  as  two  nonstop  flights  (1-2  and  2-3).   Thus, 
when  a  particular  segment  of  a  longer  route  cannot  support  nonstop  service 
by  itself,  it  is  invalid  to  infer  that  this  segment  will  be  abandoned. 

The  vast  majority  of  the  "prime  candidates  for  abandonment  under  deregula- 
tion" appear  to  have  precisely  this  characteristic;  they  are  primarily 
segments  of  longer  routes.  The  extent  to  which  this  is  the  case  may^be 
indicated  by  an  examination  I  made  of  every  tenth  city  pair  on  the  list  of 
372  in  Exhibit  B  of  the  ATA  study.   Of  the  37  pairs  I  examined,  7  m  fact 
had  no  nonstop  service  listed  in  the  April  15,  1975-  edition  of  the  Official 
Airline  Guide  (numbers  ll^O,  210,  280,  310,  320,  350,  360  on  the  ATA  list). 
Of  the  remaining  30,  there  was  no  case  in  which  more  than  half  of  the  non- 
stop flights  were  operated  exclusively  between  the  two  cities.   In  one  case, 
(number  90),  half  the  nonstop  flights  did  originate  in  one  city  and  terminate 
in  the  other.  In  each  of  the  remaining  29,  the  majority,  and  in  most  cases 
virtualiy  all,  of  the  nonstop  flights  were  segments  of  longer  routes.   It 
may  also  be  of  some  interest  that  7  of  the  37  city  pairs,  including  one  of 
those  which  in  fact  had  no  nonstop  service  by  regulated  carriers,  had  non- 
stop service  provided  by  commuter  airlines  (numbers  30,  120,  140,  150,  170, 
200,  220). 

This  examination  leads  me  to  conclude  that  the  ATA  study  simply  cannot  be 
relied  upon  to  predict  the  likely  configuration  of  airline  service  under 
deregulation.  Its  inclusion  of  so  many  markets  already  being  served  by  non- 
CAB-regulated  carriers  may  in  fact  indicate  the  potential  that  reduced 
regulation  has  for  improving  service  in  other  markets.  But,  in  any  case, 
the  spectre  of  mass  abandonment  of  nonstop  service  under  deregulation  is 
produced  by  a  methodology  so  flawed  that  it  merits  the  most  extreme 
skepticism. 

There  are  other  aspects  of  the  study  that  also  merit  skepticism.  For  exam- 
ple, the  implicit  identification  of  service  quality  with  nonstop  service  is 
questionable.   There  is  clearly  a  tradeoff  between  limited  nonstop  service 
and  more  extensive  service  with  seme  stops.  The  conclusion  that  lower  fares 


425 


will  always  reduce  flight  frequency  on  profitable  routes  is  also  question- 
able, because  it  is  based  on  the  existing  regulated  airline  cost-structure 
and  regulatory  restriction  of  entry.  The  plain  fact  is  that  where  entry  by 
unregulated  carriers  has  occurred,  as  in  Texas  and  California,  lower  fares 
have  widened  the  market  sufficiently  to  produce  more  rather  than  less  fre- 
quent flights. 

I  hope  that  my  comments  are  of  some  assistance  to  you. 

Sincerely  vours, 


/     /, 


Professor  of  Business 
Economics 


SP:gb 


426 


UNIVERSITY  OF  VIRGINIA 

JAMES    WILSON    DEPARTMENT    OF    ECXJNOMICS 
CHARLOTTESVILLE 


May  12,  1975 


The  Honorable  Edward  M.  Kennedy 
Chairman,  Subcommittee  on  Administrative 

Practice  and  Procedure  of  the 

Committee  on  the  Judiciary 
United  States  Senate 
Washington,  D.C.  20510 

Dear  Senator  Kennedy: 

I  write  in  reply  to  your  request  of  April  29,  1975  for 
a  review  of  the  Air  Transport  Association  of  America  study 


_,..ied 
V..V-  *-6..w  >-  r Even  given  this  in- 
adequate scope,  the  study's  categorization  of  routes  as  "profit 
able"  or  "unprofitable"  is  unreliable  and  cannot  sustain  the 
implications  under  its  assumptions,  namely  that  certain  routes 
will  be  denied  service  under  deregulation. 

The  conclusions  stated  in  Dr.  James'  letter  cannot  be 
supported  by  the  ATA  study.   No  claim  that  "scheduled  air 
service  might  be  eliminated"  is  possible  because  no  evidence 
is  presented  showing  that  a  new  entrant  would  not  be  motivated 
to  offer  service.   Indeed,  the  ATA  analysis  implies  enormous 
profit  for  the  Airline  System,  which  under  deregulation  should 
invite  abundant  new  entry  and  thereby  undercut  any  claim  that 
service  would  be  eliminated.   Nor  is  there  any  basis  for 
assertions  at  page  2  that  subsidized  routes  might  not  survive 
or  that  service  would  be  unstable.   Claims  that  lower  rates 
would  make  many  more  routes  unprofitable  and  would  increase 
subsidy  needs  also  cannot  be  supported  by  the  ATA  study. 


427 


The  outstanding  weakness  of  the  ATA  study  is  that  it  gives 
no  attention  to  the  functioning  of  market  processes,  which 
surely  will  accompany  deregulation.   In  particular,  despite 
the  enormous  profit  rates  implied  by  the  ATA  simulation,  the 
reader  will  look  in  vain  for  any  consideration  of  the  possibility 
of  entry  into  the  airline  industry  by  a  new  firm.   The  analysis 
simulates  the  action  of  a  gigantic  Airline  System  controlling 
completely  the  provision  of  airline  service  without  giving  any 
consideration  to  the  possibility  that  a  firm  outside  this  organi- 
zation would  see  how  profitable  the  airline  industry  is  and 
decide  to  enter  it.   Although  it  thereby  casts  the  airline  in- 
dustry virtually  as  a  monopoly  and  examines  how  much  service  it 
would  offer,  the  study  never  pursues  the  equally  important 
monopolist's  decision  about  fares,  but  rather  it  merely  maintains 
1973  fares.   So  even  as  an  analysis  of  monopolistic  organization 
of  the  airline  industry  the  study  is  incomplete. 

Any  study  of  effects  on  the  airline  industry  of  deregulation 
must  focus  on  the  prospects  for  entry  by  new  firms.   For  it  is 
through  entry  and  exit  that  competitive  markets  achieve  their 
efficiencies.   A  well  known  and  most  crucial  feature  of  current 
airline  regulation  is  its  restriction  on  new  entrants  seeking  to 
provide  various  categories  of  airline  service.   Indeed,  the  exit 
of  firms  from  the  industry,  or  the  termination  of  service  between 
city  pairs  which  is  emphasized  in  the  ATA  study,  is  a  much  less 
important  issue  than  entry,  particularly  when  exit  often  is 
already  allowed  much  more  readily  than  entry  under  current  regu- 
latory practices.   To  examine  the  consequences  of  deregulation 
it  is  essential  that  entry  and  exit  be  probed. 

The  ATA  study  ignores  the  possibility  of  new  entry  and 
indeed  it  does  not  even  consider  1,267  non-subsidized  routes  of 
regional  air  carriers  which  already  are  in  existence.   As  a  con- 
sequence its  implications  simply  are  of  no  interest  for  the 
question  at  issue,  namely,  what  will  happen  as  a  result  of  de- 
regulation?  Having  implicitly  ruled  out  by  assumption  a  major 
source  of  airline  service  to  be  expected  under  deregulation,  that 
by  new  carriers,  any  claim  by  ATA  that  service  will  not  exist  in 
any  market  is  obviously  unreliable.   One  need  not  seek  mistakes 
in  calculations  or  faulty  execution  of  ATA ' s  method;  the  method 
of  analysis  is  inadequate  and  inappropriate  in  its  assumptions 
and  in  its  design,  and  therefore  it  is  incapable  of  predicting 
loss  of  service  under  deregulation.   Ignoring  new  entry  in  this 
way  is  also  certain  to  lead  to  misleading  results  because 


428 


profit  is  so  high  that  entry  will  be  motivated. 

One  flaw  does  seem  obvious  in  the  study,  however,  even 
apart  from  its  excessively  limited  scope  in  ignoring  new  entry, 
although  not  enough  information  is  provided  in  the  study  to 
allow  definitive  analysis  of  the  flaw's  effects.   The  division 
of  routes  by  ATA  into  "profitable"  and  "unprofitable"  categories 
apparently  does  not  consider  explicitly  that  passengers  carried 
on  some  routes  labeled  "unprofitable"  by  ATA  actually  travel 
farther  and  cause  profit  to  be  earned  on  routes  labeled  "profit- 
able" by  ATA.   The  importance  of  this  possibility  is  that  it 
means  part  of  the  profit  assigned  by  ATA  to  "profitable"  routes 
actually  should  have  been  assigned  to  routes  classified  by  ATA 
as  "unprofitable."   Thus  the  profitability  categorization  by 
ATA  is  potentially  spurious,  and  it  certainly  cannot  sustain 
any  claim  that  routes  categorized  as  "unprofitable"  under  ATA ' s 
method  would  not  continue  to  be  served  by  the  source  of  service 
ATA  considered  (not  to  mention  alternative  sources,  which  were 
arbitrarily  and  inappropriately  ignored  in  the  ATA  study). 

It  is  possible  that  some  of  the  economies  claimed  in  the 
ATA  study  through  higher  load  factors  actually  can  be  achieved 
under  deregulation,  because  current  regulatory  practices  can 
lead  to  lower  than  optimal  load  factors,  which  raise  costs.   We 
presently  rely  on  control  over  price  plus  competition  in  non- 
price  areas  among  existing  air  carriers  who  are  protected  from 
new  entry,  as  our  means  of  economic  regulation  of  airlines.   If 
price  is  set  too  high  under  this  arrangement  the  competing 
carriers  will  have  an  incentive  to  schedule  many  flights  because 
flights  are  so  profitable  (see  George  W.  Douglas  and  James  C. 
Miller  III,  Economic  Regulation  of  Domestic  Air  Transportation: 
Theory  and  Policy  (Washington,  D.C.:   The  Brookings  Institution, 
1974)  for  an  excellent  analysis  of  this  consequence  of  current 
regulation),  with  the  result  that  load  factors  will  fall.   The 
competition  of  existing  airlines  thus  effectively  raises  costs, 
at  least  until  only  normal  profits  are  earned  and  further  non- 
price  competition  is  not  motivated.   If  new  carriers  were  allowed 
to  enter  the  market,  price  control  would  not  be  needed  and  so 
such  a  result  could  not  persist,  because  the  new  entrants  would 
force  price  down.   The  ultimate  equilibrium  would  be  tailored 
more  to  consumers'  preferences  between  flight  frequency  (and 
other  non-safety  aspects  of  service  quality)  and  price.   Such 
important  consequences  of  deregulation  were  not  broached  in 
the  ATA  study,  however. 

The  ATA  study  also  implies  that  profitability  will  increase 
enormously  under  deregulation.   Profit  from  airline  services  as 


429 


considered  by  ATA  will  more  than  double  while  the  amount  of 
service  and.  in  turn,  the  needed  level  of  investment  will  be 
only  a  fraction  of  what  it  is  now.   The  implied  rate -of -retu: 
on  airline  investment  is  consequently  very  high    We  have 
abundant  evidence  that  without  laws  preventing  them,  high 
rates  of  return  always  bring  expansion  and  new  entry,  so  the 
arbitrary  exclusion  of  such  consequences  by  ATA  obviously  is 
crucial  to  the  results  obtained.   It  is  inconceivable  that 


accompanied  by  high  prof it .  for  such  results  together  would  be 
inconsistent  with  the  functioning  of  competitive  markets. 

It  should  be  mentioned  here  again  that  the  ATA  study 
fectL^  ^  -jaintains  1973  fares.   Were  the  Airline  System  pro- 
tected as  fully  from  new  entry  as  the  ATA  study  assumes,  the 
System  almost  certainly  would  move  to  higher  fares  and,  depending 
on  consumer  responses  which  are  not  treated  in  the  study,  it  is 
possible  that  routes  would  then  be  even  more  profitable  and 

in  lin^t^  ^'"^"^''°"'-^^^^"'^^  ^y  ^^^  ^""I'i  "°t  be  motivated.   Thus 
in  addition  to  ignoring  new  entry,  by  considering  no  mechanism 
for  changing  price  from  1973  levels  (except  for  arbitrary  per- 
centage reductions  due  to  causes  that  are  never  explained) ^the 
tltl         ""    Ignores  the  role  of  market  mechanisms  fo?  determining 
III    in^lu         '    ^'    '"'■^^""  °"'P"^-   Although  it  may  be  of  UmUed 
use  m  the  present  regulatory  environment,  since  the  ATA  study 
does  not  allow  for  the  functioning  of  market  processes   it  ?s 
wholly  inadequate  to  deal  with  the  consequences  of  der;g;iat ion . 

ATA   J"/°"^l"ding  so  firmly  that  the  findings  of  the  present 
ATA  study  are  without  merit  I  do  not  wish  to  criticize  the  ATA 
ev^'tu:ti;rc;n/'  "^^    "°'  unreasonable  of  the  iTA^ti'^urn^for'' 
evaluating  consequences  to  the  simulation  model  which  it  already 


RS/jbm 


)herms 
'rol^ssor   of   Economics 


430 


Purdue    University 

KRANNERT      GRADUATE      SCHOOL 

O  F 

INDUSTRIAL      ADMINISTRATION 

KRANNERT    BUILDING 

WEST    LAFAYETTE,    INDIANA    47907 


May  9,  1975 


Senator  Edward  M.  Kennedy,  Chairmaji 
Subcommittee  on  Administrative  Practice 

and  Procedure 
United  States  Senate 
Washington,  D.  C  20510 

Deax  Senator  Kennedy: 

This  letter  is  in  response  to  your  correspondence  of  May  1,  1975, 
which  asked  me  to  comment  upon  the  Air  Transport  Association  Study, 
"Consequences  of  Deregulation  of  Scheduled  Air  Transport  Industry." 
My  basic  conclusion  is  that  the  ATA  simvilation  is  an   inappropriate 
model  to  use  in  order  to  investigate  the  resulting  changes  in  a 
deregulated  narket  for  the  tr\ink  earners.  Its  results  of  elimina- 
tion or  vast  curtailment  of  service  must  then  be  considered  highly 
suspect.   In  this  regard,  my  analysis  echoes  those  of  the  Greenspan- 
Miller  and  Rees-Eads  letters,  which  you  were  so  kind  to  enclose. 

The  crucial  question  the  committee  faces  regarding  the  issues  of 
deregulation  is  the  following:  "What  system  of  controls  (if  any) 
should  be  imposed  in  order  to  maJte  the  public  best  off?"  From  an 
economic  standpoint,  I  will  argue  that  a  competitive  market  is  best 
for  a  number  of  reasons. 

I  feel  that  a  closer  examination  should  be  made  using  the  examples 
of  intrastate  commerce  (not  under  CAB  price  regulations),  in  order 
to  investigate  the  possible  consequences  of  deregulation.  Two  of 
my  colleagues,  Ron  Adelsman  and  Mike  Pustay  provided  me  with  useful 
insights  into  the  problem.  My  opinions  expressed  here  are  my  own 
and  do  not  reflect  the  views  of  Purdue  University. 

I  hope  this  material  will  be  of  assistance  to  you;  thank  you  for 
your  consideration. 

Sincerely, 

a.,..^ou  .'^ih..  ■^y/'^, 

Andrew  Whinston 

Professor  of  Economics,  Management 

and  Computer  Science 

AW/lg 

End. 


431 


COMMENTS  ON  AIR  TRANSPORT  ASSOCIATICHJ'  S  ANALYSIS 
CF  THE  CONSEQUENCES  OF  AIRLINE  DERBGrULATION 

In  the  ATA  stxidy,  Dr.  James  states  that  there  are  basically  three 
ajrproaches  one  can  take  in  analyzing  the  consequences  of  a  deregulated 
maxket:  simulation,  macroeconomic,  or  study  of  a  deregulated  environment. 
The  macroeconomic  model  is  dismissed  as  "intellectually  elegant,  has  the 
dlssuivantage  that  it  cannot  be  validated."  Two  examples  of  the  last 
approach  are  given:  the  pre-1938  era  and  the  California  (intrastate) 
market.  The  author  discards  the  first  beca\ise  the  airline  market  today 
is  vastly  different  (l  agree),  and  he  casually  dismisses  the  second  by 
terming  it  "chaotic."  Thus,  ve  are  left  vrLth  no  choice  but  to  take  the 
simulation  approach. 

There  is  nothing  inherently  wrong  with  performing  a  simulation  per 
se,  and  certainly  the  Lockheed  simulator  is  well  respected  and  widely  lised, 
as  was  pointed  out  by  Dr.  Miller  in  his  letter  (page  2).  But,  if  the  model 
is  misused  by  subjecting  it  to  a  ta^k  for  which  it  was  not  designed  and 
is  ill  prepared  to  handle,  we  face  possibly  disastrous  consequences  for 
timsting  its  output,  as  was  mentioned  by  Dr.  James  himself.  As  has  been 
described  by  the  other  letters,  the  simulation  is  indeed  faulty   in  a 
number  of  areas.  Furthermore,  the  ATA  seems  somehow  to  have  misconstrued 
the  present  legislation  before  the  committee.  As  a  result,  the  conclusion 
that  of  the  99U  trunk-carrier  routes  analyzed,  "372  would  be  candidates 
for  elimination  under  deregulation,  while  nearly  all  of  the  remaining  622 
could  experience  a  sharp  curtailment  of  service"  (page  1)  has  no  legitimate 
basis  for  support. 

In  order  to  bolster  the  claim  that  the  output  of  the  model  is  in 
error,  one  can  take  two  approaches :  discredit  the  model  itself  by  point- 
ing out  its  inadeqiiacies  and/or  show  that  the  output  provides  irrational, 
answers  to  the  input  questions.  At  this  jvmcture,  I  will  reiterate  the 
main  problems  in  using  the  Lockheed  simulator  to  answer  the  question  of 
"What  would  happen  to  flight  service  in  a  deregulated  environment?" 


432 


Faiilts  of  the  A3A  Simulation  Approach 

The  model  does  not  simulate  competition;  it  assvmies  either  a  monopolistic 
airline  or  a  firm  with  a  constant  market  share.  Since  the  proposed 
legislation  of  deregulating  prices,  if  passed,  wovdd  have  the  primary 
impact  of  stimulating  competition,  a  model  that  ignores  this  basic 
issue  is  inadequate  at  best. 

The  city-pair  method  of  analysis  is  a  heuristic  approach  to  the  problem 
that  has  two  attendant  faults.  Since  a  full-costing  approach  has  been 
taken,  some  common  fixed  costs,  such  as  depreciation,  mxist  be  artificially 
allocated.  This  procedure  is  not  an  Incremental  analysis  as  was  re- 
quested by  the  committee.  Ftcrthermore,  the  concept  of  one  leg  of  a 
multi-stop  trip  being  a  loss  leader  for  the  entire  tour  has  been  sup- 
pressed. 


.B 


Not        Very 
profitable    Profitable 


Small  Profits 


Small  Profits 


Thus,  although  Profit  could  well  exceed  Profit  ,  since  the  leg  AB 
is  a  loss  leader,  fliglit  service  wovQd  erroneously  be  cut  from  city  A 
to  city  B.  Tliis  can  result  when  most  of  the  passengers  from  A  wish 
to  travel  to  C. 

Althoi\gh  the  ATA  study  does  investigate  the  effects  due  to  the  price 
elasticity  of  demand  (cuts  in  fares  of  10^  and  20^),  it  completely 
ignores  the  effects  due  to  the  service  elasticity  of  demand.  Suppose, 
for  the  sake  of  argument,  that  service  between  cities  A  and  B  were 


433 
-  3  - 

curtailed.  Then,  those  displaced  passengers  would  have  three  choices : 
cancel  their  trip,  travel  by  another  mode  of  transportation,  or  travel 
CO  one  of  the  remaining  flights.  The  proportion  that  exercised  the 
last  option  would  increase  load  factors  and  profits  of  the  airlines 
retaining  service.  This  service  elasticity  has  not  been  ta>.en  into 
account  by  the  AIA  study.  It  would  manifest  itself  most  strongly  be- 
tween city-pairs  at  longer  distances  and  with  few  current  flights.  In 
the  extreme  case,  vdiere  there  was  only  one  flight,  that  airline  would 
control  the  market  and  would  act  as  a  monopolist.  If  his  return  on 
investment  were  inordinately  high,  competition  would  reenter  the  marketj 
thus  reducing  economic  profit. 

The  other  line  of  attack  against  the  conclusions  of  the  AIA  study  is  to 
investigate  the  reasonableness  of  its  conclusion.  Again,  most  of  these 
points  have  also  been  mentioned  previously. 

Issue 

1.  The  output  of  the  ATA  study  shows  that  given  1973  costs  and  revenues, 
the  trunk  airlines  would  eliminate  or  curtail  service  if  they  could  do 
so.  As  a  matter  of  fact,  those  airlines  do  have  the  capability  of 
vastly  cui't ailing- their  service  under  present  CAB  regulations,  but  for 
"some  reason"  have  chosen  not  to  do  so.  Tlie  certificate  of  serive 
only  imposes  lower  bounds  (usually  one  or  two  daily  flights)  into  and 
out  of  a  city  —  note:  not  between  city-pairs.  Thus,  the  trunks  can 
presently  cut  their  service  levels,  a  fact  that  casts  doubt  upon  the 
validity  of  the  ATA  model.  Since  airline  managements  are  presumably 
profit  maximizers,  the  fact  that  service  has  been  maintained  is  an 
indication  that  they  feel  that  there  is  a  realization  of  incremental 
profit,  contrary  to  the  sim'olation  results. 

2.  As  \«is  indicated  by  the  other  two  letters  operating  at  so-called 
optiraality  wo-old  yield  a  $2  billion  profit  with  a  ROI  over  70^,  a 
patently  ridiculous  result  which  can  occur  by  misapplying  the  model 
which  ignores  competition  to  its  extremes. 

3.  The  proposed  legislation  at  present  does  not  deal  with  elimination  of 
subsidies  to  the  local  airlines,  a  complex  issue  in  its  own  right. 


51-146  O  -  76  -  pt.  1  -  29 


434 


Yet,  the  ATA  study  monetheless  lumps  these  1,198  local  service  routes 
Into  their  results,  claiming  (with  no  support)  that  these  too  would 
be  candidates  for  elimination.  a3ieir  inclusion  in  the  graphs  (as 
pointed  out  by  George  Eads)  appears  to  be  a  smoke  screen  aimed  at 
buttressing  their  argument. 

Having  hopefuUiy  laid  to  rest  the  specter  of  mass  cancellation  of  flights 
(since  this  tactic  is  presently  available  and  has  not  been  exercised),  I 
will  now  turn  to  what  I  feel  is  the  relevant  issue  before  the  committee: 
"What  are  the  costs  and  benefits  associated  with  the  deregulation  of  prices 
for  the  trunk  airlines?"  From  an  economic  perspective,  the  following 
arguments  can  be  advanced: 

1.  Currently  aTL  price  variations  are  subject  to  CAB  approval.  The 
delay  factor  in  seeking  and  getting  approval  for  fare  changes 
inhibits  rapid  adaptation  to  changing  demand  patterns  in  the  market. 
In  a  "ftree"  market  no  longer  would  this  flexibility  be  retarded. 

2.  Fixing  prices  reduces  competition  and  protects  inefficiency. 
Basically  each  airline  firm  faces  three  kinds  of  competition: 
substitution  effect  -  traveling  via  another  mode  of  transportation, 
price  effect  —  traveling  on  another  airline  that  flies  more  cheaply, 
and  differentiation  effect  -  traveling  on  another  airline  because 
it  is  more  preferred  for  reasons  other  than  price.  When  prices  are 
set,  the  first  two  components  of  competition  are  also  fixed.  Thus, 
intra-industry  competition  has  been  substantially  reduced.  If  the 
set  price  is  too  low,  firms  will  not  make  a  profit  and  will  elimin- 
ate Eci-vice  (get  out  of  the  market),  which  they  can  do,  in  general. 
If  the  set  price  is  "on  the  mark"  no  harm  will  have  been  done, 

But,  if  the  price  is  too  high,  the  consumer  is  in  effect  subsidizing 
the  trunks  with  the  Impiicit  sanction  of  the  government.  Carriers 
vrtiich  norraaUy  could  not  derive  a  profit  can  continue  to  exist  on 
this  subsidy.  Furthermore,  by  their  very  existence  they  raise  the 
cost  of  entry  to  the  market.  Thus,  other  firms,  presently  outside 
of  the  market,  might  be  able  to  fiy  routes  more  economically,  but 
current  market  penetration  by  inefficient  carriers  prevents  their 
entrance  into  the  market  place. 


435 


-  5  - 

3.  Due  to  reduced  price  competition,  the  airline  industry  may  tend 
to  overallocate  expenditures  in  seversLL  areas  as  advertising  and 
other  non-price  promotional  categories. 
k.     There  is  no  real  Justification  for  setting  prices.  The  airline 

industry  is  not  monopolistic,  nor  is  it  a  public  utility.  Certainly, 
minimum  safety  standards  must  be  maintained;  but  allowing  price 
competition  has  no  bearing  on  this  issue. 
I  have  argued  from  an  economic  perspective  irtiy  deregulation  should  be 
undertaken.  The  gnawing  question  of  what  would  then  happen  still  remains. 
Would  prices  remain  fixed  or  go  dovm?  Would  service  decrease  or  increase? 
No  one  has  a  crystal  ball.  The  AIA  looked  at  the  problem  only  from  the 
service  angle;  I  believe  their  excmination  was  faulty.  According  to  its 
Hiase  9  opinion  in  the  Domestic  Passenger  Fare  Investigation,  the  CAB 
concludes  that  price  setting  results  in  an  elimination  of  excess  profits 
via  a  supersatxaration  of  flights  in  the  market  (thus  diminishing  load  factors 
to  the  breakeven  level) .  If  the  trunk  market  were  deregxolated,  the  following 
fare-service  situations  coxild  occur  for  a  given  city -pair: 

1.  No  change  in  price  because  the  regulated  price  accurately  reflected 
the  free  market  clearing  value.  In  that  case  the  trunks  would  have 
no  incentive, to  change  their  service  (everything  else  remaining  the 
same). 

2.  Price  of  fares  decrease  because  the  public  "subsidy"  has  been 
eliminated.  Indeed,  service  most  likely  would  be  curtailed  some- 
what, the  amo\jnt  depending  on  both  the  price  and  the  service  elas- 
ticities of  demand.  The  airlines  would  become  more  competitive 
and  efficient;  their  scheduling  times  would  cater  more  to  the 
variations  of  customer  demand.  The  profit  picture  of  the  trunks 
WDXild  not  significantly  change;  in  neither  the  pre-  nor  the  post- 
deregulation  periods  would  they  be  making  excess  profits.   In 
fact,  if  anyone  would  be  adversely  affected,  it  would  be  the  equip- 
ment manufacturers.  The  public  would  be  better  off  because  their 
fares  would  be  reduced,  and  the  airlines  would  be  more  rapidly 
responsive  to  their  changing  demand  patterns.  The  amount  of  the 
drop  in  service,  I  feel,  would  not  be  significant.   In  any  event, 


436 


-6  - 

the  wholesale  cancellation  of  scheduled  fli^ats  would  not  occur  for 

reasons  mentioned  previously. 
Since  the  simulation  model  has  not  provided  definitive  answers  to  the 
questions  posed  by  the  connittee,  the  next  task  is  to  seek  the  appropriate 
avenue  of  investigation.  There  ore  basically  the  three  approaches  mentioned 
by  Dr.  James  in  his  letter: 

1.  Build  a  macroeconomic  model.  To  construct  such  a  model  from 
scratch  in  which  one  could  place  faith  in  its  output  would  be  a 
most  difficult  task. 

2.  Build  a  simulation  model  that  appropriately  reflects  the  problem 
at  hand.  To  incorporate  congjetition,  service  elasticity  of  demand, 
and  correct  the  misallocation  of  costs  via  the  city-pair  method 
would  be  a  formidable  job. 

3.  Study  the  effects  of  non-regulation  in  price  in  some  of  the  larger 
states  ~  say  California  and  Texas.  The  market  in  these  states 
could  then  serve  as  a  microcosm  for  a  nationwide  projection.  In 
partic\alar,  I  feel  that  a  more  thorough  analysis  of  fare  and  service 
rate  changes  should  be  made  with  regard  to  the  entrance  into  the 
market  of  Pacific  Southwest  Airlines  (PSA)  and  Southwest  Airlines 
(WN). 


' 


437 

Prepared  Statement  of  George  W.  Douglas 

I  am  grateful  for  the  opportunity  to  come  before  you  today  to  comment  on  the 
regulation  and  performance  of  our  airline  industry.  In  the  current  inflationary 
environment  it  is  particularly  appropriate  that  your  committee  undertake  to 
examine  the  operations  and  policies  of  the  Civil  Aeronautics  Board.  For  while  in 
the  early  years  of  the  industry  the  modus  operandi  and  protective  policies  of  the 
Board  ma.v  have  served  a  useful  role,  they  are  in  large  measure  now  outmoded 
and  now  serve  primarily  to  significantly  increase  the  costs,  energy  usage,  and 
prices  of  air  transportation.  Certainly  in  an  era  of  inflation,  energy  shortage,  and 
general  financial  stringency  we  can  ill  afford  to  perpetuate  these  costly  and  waste- 
ful practices. 

I  should  like  to  note  at  the  outset  that  I  do  not  attribute  this  state  of  affairs  to 
venality  of  the  regulators :  tliey  have  not  structured  or  regulated  the  industry 
so  as  to  bestow  excessive  profits  on  the  air  carriers.  Rather,  the  effect  of  the 
traditional  regulatory  practices  and  policies  of  the  CAB  has  been  substantial  in- 
creases in  the  costs  of  the  carriers  and  fares  paid  by  the  public  for  air  travel. 
While  the  regulatory  policies  which  increase  costs  and  prices  are  numerous,  by 
far  the  dominant  aspect  of  waste  is  associated  with  the  excessive  level  of  empty 
seats  carried  in  the  system.  While  the  nature  of  the  market  requires  that  some 
proportion  of  the  seats  on  average  be  unfilled,  the  level  which  prevails  is  exces- 
sive. I  have  calculated  that  from  this  source  alone,  the  costs  and  fares  of  pas- 
sengers in  1969  were  in  the  range  of  $366  million  to  $538  million  in  excess  of  the 
fares  they  would  have  paid  in  the  absence  of  this  waste.  While  I  have  not  access 
to  current  data  which  would  enable  me  to  completely  reestimate  these  results  for 
1974.  by  extrapolation  they  would  be  on  the  order  of  $850  million.  One  can  gain  a 
similar  "real  world"  perspective  of  these  costs  by  comparing  the  fares  which 
prevail  in  the  intrastate  markets  of  California  and  Texas  and  those  of  similar 
interstate  markets  on  the  east  coast.  I  have  described  these  fares  in  table  1,  and  as 
as  you  can  see  those  in  the  CAB  regulated  interstate  markets  are  from  29  percent 
to  109  percent  higher.  I  have  also  calculated  in  an  earlier  study  the  fares  which 
could  prevail  in  other  interstate  markets,  taking  into  account  all  tho.se  factors 
which  would  affect  the  level  of  eflScient  costs,  such  as  distance,  market  density, 
aircraft  t.vpe,  service  quality  and  convenience.  These  "optimal"  fares  and  the 
actual  coach  fares  of  1972  are  reported  for  several  markets  in  table  2.  While 
some  minor  portion  of  the  observed  differences  can  be  attributed  to  other  sources 
(i.e.,  weather  and  traffic  delays,  terminal  costs  and  landing  fees),  the  major  rea- 
son why  the  California  and  Texas  carriers  can  operate  profitably  at  such  a  con- 
siderably lower  fare  is  their  significantly  higher  load  factor  (i.e.,  proportion  of  the 
total  seats  filled).  Since  most  of  the  costs  in  air  transport  are  simply  those  of 
flying  the  aircraft  from  terminal  to  terminal,  clearly  the  average  cost  per  pas- 
senger is  reduced  by  increasing  the  number  of  passengers  per  flight.  There  is  ab- 
solutely no  reason  why  the  invisible  state  boundaries  over  which  the  aircraft  pass 
on  these  and  other  interstate  routes  should  change  the  nature  of  the  airline  mar- 
kets so  that  these  passengers  should  continue  to  pay  these  excessive  fares. 

TABLE  I.-COMPARISON  OF  FARES  IN  SELECTED  INTRASTATE  AND  INTERSTATE  MARKETS  (DECEMBER  1974) 


City-pair  market 


Fare  (cents 
Distance        Coach  fare  per  mile) 


Boston-Washington 

San  Diego-San  Francisco '._ 

Chicago-Minneapolis 

Los  Angeles-San  Francisco' 

New  York-Washington 

Dallas-San  Antonio' 

Boston-New  York 

Washington-Philadelphia. . . 
Los  Angeles-San  Diego ' . .  - 


413 

$45. 00 

10.90 

449 

29.00 

6.46 

344 

42.00 

12.21 

355 

20.75 

5.84 

228 

2  29.00 

3  12.72 

253 

^25.00 

5  9.  88 

186 

26.00 

13.98 

133 

24.00 

18.05 

101 

10.75 

10.64 

'  Intrastate  markets  not  under  CAB  regulation. 
-  $25  off  peak  or  night  coach  fare. 
3  $10.96  off  peak  or  night  coach  fare. 
*  $15  off  peak  or  night  coach  fare. 
^  $5.93  off  peak  or  night  coach  fare. 


180 

$16.82 

$24.  00 

$20.  85 

1.24 

184 

20.63 

23.00 

19.97 

.97 

256 

18.67 

28.00 

24.23 

1.30 

675 

32.29 

55.00 

46.63 

1.44 

1,092 

44.65 

83.00 

69.95 

1.57 

1,627 

64.99 

113.00 

93.05 

1.43 

2,453 

86.88 

163. 00 

134.21 

1.54 

2  434 

92.10 

155. 00 

127.63 

1.39 

438 

TABLE  2.-ESTIMATES  OF  OPTIMAL  AIR  COACH  FARES  AND  ACTUAL  FARES,  SELECTED  MARKETS 
[In  19711 

Ratio  of 

Optimal  Coach  Adjusted     adjusted  yield 

City-pair  market  Distance  fare  fare  yield'    to  optimal  fare 

Baltimore-New  York 

Huntsville-Memphis 

Chicago-St.  Louis 

Chicago-Philadelphia 

New  York-Miami 

Denver-New  York 

Los  Angeles-New  York.. 

San  Francisco-Washington 

1  Adjusted  for  incidence  of  discount  fares  (see  CAB  docket  21866-9,  exhibit  BC-6006). 

Source:  George  W.  Douglas  and  James  C.  Miller,  III,  "Economic  Regulation  and  Domestic  Air  Transport,"  The  Brook- 
ings Institution,  Washington,  1974. 

The  ostrich-like  attitude  of  the  CAB  in  ipnoriug  the  lessons  of  tlae  California 
experience  and  in  not  seeking  the  manifest  henefits  which  could  he  obtained  for 
the  travelling  public  generally  can  only  be  regarded  as  scandalous.  This  attitude 
of  the  Board  was  not  based  on  ignorance ;  as  early  as  August  1965,  a  CAB  staff 
report  carefully  pointed  out  the  fares,  costs  and  profitability  in  the  California 
intrastate  markets.  (See  S.L.R.  Brown  and  Associates,  "Traffic.  Fares  and  Com- 
petition/ Los  Angeles-San  Francisco  Air  Travel  Corridor."  Staff  Research  report 
No.  4,  Research  and  Statistics  Division,  Bureau  of  Accounts  and  Statistics, 
August  1965). 

To  understand  how  these  cost  and  fare  differentials  arise  between  the  inter- 
state routes  under  CAB  regulation,  and  the  intrastate  routes,  which  are  not,  one 
must  look  to  the  nature  of  the  airline  markets  under  CAB  regulation.  The  prin- 
cipal aspects  of  CAB  regulation  which  have  brought  us  the  high  cost-high  fare 
markets  are  those  affecting  price  competition  and  entry.  Effective  price  compe- 
tition (where  it  in  fact  exists)  in  the  unregulated  industries  serves  an  im- 
portant role  in  both  keeping  prices  in  line  with  the  lowest  possible  costs  of  pro- 
duction of  goods  of  a  given  quality,  and  in  forcing  producers  to  produce  effi- 
ciently. On  examination  of  the  history  of  CAB  policy  in  this  area,  one  can  only 
conclude  that  its  principal  thrust  has  been  to  discourage  or  suppress  price  com- 
petition among  the  carriers.  Carriers  are  discouraged  from  comi)eting  with  price 
because  fare  changes  must  be  filed  with  the  Board,  and  are  subject  to  challenge 
by  their  rivals.  Having  observed  a  pattern  of  disapprovals,  they  understandably 
seek  other  avenues  of  rivalry. 

Complementing  the  discouragement  of  price  competition  is  the  Board's  con- 
sistent sheltering  of  the  industry  from  competition  by  new  firms.  Upon  the 
establishment  of  the  CAB  in  1938,  the  existing  carriers  were  given  certificates 
of  public  convenience  and  necessity  accorded  them  by  their  "grandfather"  rights. 
While  the  CAB  has  allowed  the  entry  of  a  new  class  of  "local  service"  carriers, 
it  has  not  allowed  the  entry  of  a  single  new  trunk  carrier  to  compete  in  the 
principal  markets  since  1938.  CAB  entry  protection  has  been  sufficient  to  enable 
the  grandfather  carriers  to  retain  about  nine  tenths  of  total  domestic  air  service, 
despite  a  250-fold  increase  in  total  traffic  since  193S.  Since  in  unregulated  indus- 
try the  absence  of  effective  price  competition  and  excessive  prices  brings  about 
new  entrants,  one  can  see  the  importance  of  the  foreclosure  of  entry  in  discourag- 
ing effective  competition.  While  the  Board  has  granted  the  entry  of  existing  firms 
Into  formerly  monopoly  markets  (i.e.,  between  two  cities)  so  that  monopoly  itself 
is  not  a  major  problem,  the  fact  that  each  firm  faces  the  same  rival  in  many 
markets  reduces  the  incidence  of  competition. 

It  should  be  pointed  out,  as  well,  that  a  monopoly  is  not  required  for  the  effi- 
cient operation  of  air  transportation.  Unlike  the  generation  and  distribution  of 
electric  power,  for  example,  econometric  studies  of  the  airline  industry's  costs 
are  virtually  unanimous  in  showing  tlie  lack  of  scale  economies.  That  is,  in  the 
former  case,  since  electric  power  can  be  produced  and  distributed  in  a  city  at 
less  cost  by  one  large  firm  than  four  smaller  firms,  it  is  in  the  public  interest  to 
establish  and  regulate  a  monopoly.  This  is  not  the  case  in  the  airline  industry. 

While  the  airlines  do  not  compete  with  prices,  they  do  compete  in  other  ways, 
such  as  advertising  and  the  provision  of  passenger  services  and  amenities.  This 
form  of  competition  is  beneficial  to  the  traveller,  and  can  be  most  noticed  in  its 
absence  in  those  markets  with  only  one  carrier  or  whether  there  is  no  effective 


439 

competition  for  some  other  reason.  But  of  far  greater  consequence  in  attracting 
passengers  is  the  frequency  of  flights.  The  carriers  have  discovered  that  the 
surest  way  to  increase  their  share  of  the  market  is  to  increase  their  flight 
frequencies. 

Thus,  even  though  the  fares  in  most  CAB-reguIated  markets  are  too  high,  this 
does  not  mean  that  the  carriers  earn  excessive  profit.  Rather,  the  result  of  the 
nonprice  comjjetition,  i>articularly  in  .scheduling,  is  to  increa.se  the  average  cost 
per  pa.ssenger  carried  up  to  the  level  of  the  price.  In  economic  terms,  we  would 
describe  this  market  as  one  in  which  the  costs  are  determined  by  the  price,  rather 
than  the  reverse,  which  Ls  the  usual  ca.se.  While  along  with  the  higher  price,  the 
travelling  public  does  benefit  from  the  convenience  of  more  frequent  departures 
(and  a  reduction  of  the  chance  that  a  seat  is  not  available  on  the  preferred 
flight  j,  the  additional  costs  are  well  out  of  proportion  to  any  po.ssible  value  that 
could  be  attributed  to  this  convenience.  In  short,  the  reason  why  the  costs  in  the 
regulated  indu-stry  are  high  and  the  number  of  wasted  .seats  is  large  and  the 
amount  of  wasted  fuel  is  high,  is  .simply  that  the  CAB-regulated  prices  have  been 
too  high.  They  are  particularly  .so  in  the  long  distance  routes  and  in  the  densely, 
heavily  travelled  route.s. 

By  contrast,  the  regtilatory  restraints  imposed  by  the  state  commissions  of 
Texas  and  California  have  not  had  the  .same  effect.  The  intrastate  c-arriers  have 
found  that  they  can  effectively  comijete  with  a  fair  profit  by  offering  .services  at 
a  considerably  lower  price,  doing  so  becau.se  they  have  found  ways  to  reduce 
.some  operating  costs,  but  more  importantly,  by  adjusting  schedules  "so  that  they 
fly  fewer  empty  .seats.  With  commensurately  lower  fares  in  interstate  routes,  the 
CAB-regulated  carriers  would  be  forced  to  do  the  .same. 

Since  the  relatively  high-fare  high-cost  equilibrium  which  obtains  in  the  inter- 
state markets  have  not  provided  the  economical  services  the  public  deserves,  nor 
provided  the  carriers  an  exceptional  profit,  why  does  such  a  condition  exist? 

My  own  interj^retation  of  the  regulatory  hLstory  is  that  the  CAB  has  failed  to 
understand  adwjuately  the  basic  economic  forces  in  the  industry  and  the  changes 
which  have  occurred  which  should  have  altered  its  fundamental  policies. 

The  legislative  "Declaration  of  Policy"  in  the  Federal  aviation  acts  by  which 
the  CAB  operates  admonishes  the  CAB  to  "promote"  the  industry  as  well  as  reg- 
ulate it.  In  its  formative  years  as  an  "infant"  industry  it  was  the  belief  of  Con- 
gress that  its  development  was  in  the  national  interest,  and  the  industry  was  for 
many  years  encouraged  in  its  growth  by  direct  sub.sidy.  In  addition  to  direct 
subsidy  the  CAB  attempted  to  further  promote  and  expand  the  industry  by  in- 
ternal cross  subsidy.  That  is.  the  carriers  would  be  required  to  fly  a  number  of 
routes  that  could  not  cover  costs.  To  compen.sate  the  carriers  for  the.se  losses  the 
carriers  were  allowed  to  earn  exce.ss  profits  in  the  viable  markets.  To  shelter 
these  profits  required  the  competitive  restraints  described  above :  barriers  to  new 
competition  and  discouragement  of  price  competition.  While  the.se  arrangements 
for  cross  subsidy  even  in  the  indastry's  formative  years  can  be  criticized  on  eco- 
nomic grounds,  they  nonethele.ss  had  some  logic  given  the  stated  goals  of  extend- 
ing air  tran.sport  .services  as  rapidly  and  extensively  as  rx».ssible. 

The  industry  has  grown  and  prospered,  and  is  now  the  dominant  commercial 
mode  of  intercity  traveL  The  trunklines  grew  out  of  their  needs  for  direct  sub- 
sidy in  the  fifties,  and  the  role  of  expanding  .services  in  small  markets  was  as- 
sumed by  the  local  .service  carriers.  Just  as  the  trunk  carriers  have  outgrown 
their  need  for  direct  subsidy,  they  have  al.so  outgrown  the  need  for  internal  cross- 
sub.sidy.  Reflecting  thLs  in  some  extent  is  the  Boards  action  in  the  last  10  years 
or  so  of  increasing  the  number  of  carriers  in  each  viable  market.  However,  the 
traditions  of  .sheltering  and  protection  from  competition  developed  in  the  indus- 
try's early  years  have  persisted,  although  the  need  for  them  has  pas.sed.  In  the 
milieu  of  nonprice  competition,  the  fare  levels  which  would  have  once  generated 
the  excess  profits  in  the  "lucrative'"  markets,  are  dissipated  in  higher  costs  to  the 
benefit  of  no  one. 

Lest  I  Ije  misinterpreted  as  suggesting  that  the  CAB  expand  its  regulation  to 
include  the  restraint  of  .scheduling  competition,  let  me  declare  directly  that  such 
a  move  is  unneces.sary  and  undesirable.  Were  the  CAB  to  take  a  policy  which 
would  encourage  more  effective  price  competition,  the  price  level  would  fall  and 
with  it  the  level  of  exce.ss  capacity  offered.  Currently  pending  before  the  Board 
IS  an  important  ca.se  in  this  regard,  in  which  the  Board  must  consider  the  d-^-sir- 
abiUty  of  mutual  agreements  by  the  carriers  to  restrain  capacity.  This  would  in 
effect,  perfect  the  cartel,  and  if  not  coupled  with  fare  reduction.s  ( which  are  not 
propo.sed;  would  generate  excessive  profits  in  tho.se  markets.  Travellers  in  those 
markets  would  be  paying  for  a  level  of  .service  which  would  be  denied  them  bv 
anticompetitive  agreement. 


440 

The  tradition  of  attempted  cross-subsidy  and  the  Board's  apparent  aversion 
of  efficient  low-cost  air  travel  is  nowhere  more  apparent  than  in  the  interna- 
ti(mal  markets.  The  CAB,  while  not  unilaterally  regulating  these  markets, 
has  a  contributing  role  which  has  seldom  advanced  the  consumers'  interest.  In 
this  case,  the  CAB  sets  rules  which  shelter  the  international  cartel  (The  Inter- 
national Air  Transport  Association)  from  effective  price  competition.  The  plainly 
excessive  lATA  fares  are  sheltered  by  CAB  policies  which  restrain  air  charters 
with  affinity  rules,  and  now  with  minimum  fare  floors.  Moreover,  the  occasional 
proposals  for  entry  of  a  new  carrier  promising  efficient,  low-cost  service  are  re- 
jected even  though  there  is  no  credible  evidence  that  the  service  would  be 
predatory  (i.e.,  below  cost). 

The  tradition  of  cross  subsidy  is  so  engrained  with  the  regulator  and  the  in- 
cumbent carriers  (one  can  predict  its  stout  defense  by  the  Air  Transport  As- 
sociation), that  even  a  statement  of  policy  contrary  to  the  same  by  the  Board 
in  the  Domestic  Passenger  Fare  Investigation  has  had  imperceptible  results  in 
actual  policy.  Let  me  state  some  frequent  criticisms  by  economists  of  the  practice : 

1)  If  the  policy  is  effective  (generating  profits  in  some  markets  which 
subsidize  losses  in  others),  there  is  a  net  loss  of  benefits;  the  additional 
benefits  received  by  those  consuming  the  subsidized  good  or  service  are  less 
than  the  additional  costs  borne  by  those  in  the  market  providing  the 
subsidy ; 

2)  There  is  no  presumption  that  the  implicit  transfer  of  benefits  is  equit- 
able. Particularly  it  should  not  be  assumed  that  the  traveller  in  the 
"large"  market  (e.g.  the  grandmother  flying  from  New  York  to  Los  Angeles) 
has  a  higher  income  than  the  traveller  in  the  "small"  market  (e.g.  the 
businessman  flying  from  Cedar  Rapids  to  Chicago) . 

3)  The  cross-subsidy  mechanism  is  seldom  effective.  As  in  the  airline 
industry,  to  provide  one  dollar  extra  profit  in  one  market  may  require  that 
the  consumers  pay  five  or  more  dollars  in  additional  fares. 

4)  The  amount  and  value  of  the  subsidy  is  invisible,  and  not  subject 
to  regular  review  by  the  agency  or  the  Congress.  Hence,  the  level  of  sub- 
sidized services  tends  to  grow  well  beyond  that  intended.  A  corollary  is 
that  the  nonremunerative  services  provide  an  attractive  legislative  pork 
barrel  whose  costs  are  not  revealed. 

I  should  like  to  take  this  opportunity  to  speculate  on  the  various  methods  of 
reform  that  might  influence  tlie  CAB  to  lie  more  responsive  to  the  needs  of 
the  public  in  developing  an  efficient  air  transport  system.  As  is  evident  from  my 
statement  today.  I  feel  that  current  Board  i>olicy  is  misfUrected  (or  at  best, 
without  direction).  To  this  I  might  offer  some  personal  observations. 

First,  upon  initiating  my  studies  of  the  airline  industry  in  15)68.  I  was  sup- 
posed to  find  that  the  CAB.  whose  mission  is  the  economic  regulation  of  the 
industry,  had  so  few  professional  economists  on  its  staff.  The  rare  exception 
of  a  very  capable  economist  of  whom  I  am  aware,  appears  to  be  an  embarrass- 
ment to  be  ignored.  By  the  same  token,  the  membership  of  the  Board  has  never 
included  an  economist,  and  to  my  knowledge  and  observation,  the  economic 
training  and  perception  of  the  administrative  law  judges  would  appear  most 
rudimentary.  I  am  not  suggesting  that  economic  expertise  would  ensure  con- 
sistently good  decisions,  or  insulate  a  member  of  the  Board,  for  example,  from 
the  pressures  he  faces,  but  one  cannot  help  but  believe  that  there  would  be 
fewer  policies  which  aid  no  one/or  are  futile. 

Second,  the  experience  of  the  permissive  regulation  in  California  and  Texas 
suggests  that  some  substantial,  phased  movement  toward  deregulation  should 
occur.  I  say  this  from  a  background  of  pragmatism,  rather  than  from  a  doctrin- 
aire "free  market"'  philosophy.  (I  am  a  Ph.  D.  from  Yale,  not  Chicago.)  In  fact, 
one  of  the  remarkable  things  about  the  study  of  regulation  of  transportation  is 
the  consensxis  of  almost  all  economists,  "liberal"  and  "conservative."  that  it  has 
in  large  measure  failed  its  intended  purpose  or  is  currently  obsolescent,  and  is 
desired  only  by  the  industries  regulated. 

Recognizing  tlie  improbability  of  a  phased  deregulation  of  the  industry,  I 
would  like  to  offer  some  proposals  that  would  cau!<e  airline  regulation  to  be  more 
efficient  and  resjionsive  to  tlie  public.  These  proposals  were  made  by  James  C. 
Miller  III  and  me  in  our  recent  study  of  the  industry  for  the  Brookings  Insti- 
tution.^ and  are  taken  directly  from  that  study  : 


1  Goorffe  W.   Doufilas  and  James   C.   Miller  III.   Economic  Rojrulation  of  Domestic  .Vir 
Transport :  Theory  and  Policy,  Brookings.  Washington.  1974. 


441 

KEFORMS    UNDER    EXISTING    LEGISLATION 

Under  the  Federal  Aviation  Act  the  Board  has  considerable  latitude  in  framing 
regulatory  policy.  We  shall  here  describe  a  number  of  recommendations  which 
are  possible  under  the  existing  statute.  First,  a  set  of  possible  actions  that 
should  not  be  attempted. 

1.  Do  n/it  attempt  to  regulate  return  on  investment. — As  described  in  chapter  4, 
carriers  will  employ  nonprice  competition  to  a  point  where  the  anticipated  return 
on  additional  investment  is  equal  to  the  carriers'  own  internal  required  rate  of 
return.  Board  attempts  to  regulate  this  return  precisely  as  a  predetermined 
reasonable  rate  will  prove  fruitless  and  will  lead  the  market  equilibrium  away 
from  the  efficient  combination  (see  figure  4-2). 

2.  Do  not  approve  eapacitij  agreements. — As  described  previously,  the  long- 
range  effect  of  capacity  agreements  is  carrier  inefficiency  in  matching  capacity 
with  demand.  Another  result  is  excess  profits  in  capacity-controlled  markets,  pro- 
vided fares  are  not  adjusted  downward  accordingly,  which  represent  an  alloca- 
tive  efficiency  cost. 

3.  Do  not  approve  fuel  reduction  and  rescheduling  agreements. — Restrictions  on 
fuel  supplies  to  airline  firms  obviously  limit  the  amount  of  capacity  they  can 
offer.  Competition  among  firms  in  planning  schedules  leads  generally  to  an  effi- 
cient ovei-i^ll  network,  that  is,  capacity  offerings  responsive  to  passenger  demand. 
Not  only  are  rescheduling  agreements  not  needed,  but  they  lead  to  inefficiencies 
and  create  excess  industry  profits. 

4.  Do  not  limit  entry  to  protect  incumbent  carriers. — As  described  in  chapter 
7,  entry  controls  insulate  existing  carriers  from  competition.  If  a  prospective 
entrant  appears  likely  to  succeed  in  the  market  to  the  detriment  of  an  incumber 
carrier,  then  this  may  be  an  indication  that  the  new  carrier  is  more  efficient.  Pro- 
tests from  incumbent  carriers  are  to  be  exi)ected,  but  to  give  them  great  weight 
is  to  encourage  technical  inefficiency. 

5.  Do  not  suspend  or  find  unlawful  fare  decreases  on  grounds  of  protecting 
competitive  carriers. — Understandably,  whenever  one  carrier  proposes  to  reduce 
a  fare  its  competitors  will  object,  preferring  instead  the  existing  fare  level.  Re- 
fusing to  approve  such  an  initiative  protects  less  efficient  carriers  and  con- 
strains differentiation  in  price-quality  options. 

6.  Do  not  limit  exit  from  service. — If  a  carrier  wishes  to  suspend  or  abandon 
a  market,  its  decision  is  an  indication  that  the  social  value  derived  from  the 
service  is  less  than  the  cost  of  providing  it.  To  constrain  exit  is  inefficient.  (How- 
ever, the  Board  should  be  liberal  in  certificating  a  new  carrier  in  any  abandoned 
market. ) 

7.  Do  not  regulate  commuter  carriers. — Continuing  the  exemption  for  com- 
muter carriers  is  a  good  way  of  testing  the  efficiency  of  trunk-  and  local-service 
carrier  service.  That  is,  if  a  commuter  carrier  can  provide  service  under  regu- 
lator-imposed cost  disadvantages,  then  this  is  a  market  test  of  the  inefficiency  of 
trunkliue  and  local  service  carrier  provision. 

8.  Do  not  further  restrict  (charter)  operations  of  the  supplemental  carriers. — 
The  supplemental  carriers  provide  a  vital  function  in  competing  with  the  sched- 
uled carriers.  Not  only  do  they  provide  benchmarks  of  technical  efficiency,  but 
they  reveal  the  need  for  lower  price-quality  options  in  scheduled  service.  With- 
out the  supplementals  the  inefficiencies  of  trunk  service  would  be  partially 
masked. 

FEASIBLE    PROPOSALS    OF    AN    AFFIRiIATI\-E    NATURE 

1.  Detemune  and  bring  about  the  optimum  level  and  structure  of  fare-quality 
options. — Hold  a  specific  hearing  in  which  the  trade-off  between  fare  level  and 
quality  is  brought  under  close  scrutiny  and  a  determination  is  made  concerning 
the  optimal  level  and  structure  of  fares  and  quality.  At  the  same  time,  explore 
the  feasibility  of  increasing  the  number  of  price-quality  options. 

2.  Hold  general  investigations  regarding  policies  toward  entry,  exit,  mergers, 
and  collusion. — At  present,  all  of  these  matters  are  treated  on  an  ad  hoc  basis. 
An  investigation  which  looked  at  the.se  issues  in  the  same  depth  as  the  Domestic 
Passenger  Fare  Investigation  looked  at  fares  would  be  appropriate  and  presum- 
ably would  lead  to  the  identification  of  more  si>ecific,  efficiency-inducing  policies. 

3.  Encourage  price  competition  and  market  tests  of  p7-ice-quality  options. — 
Conclude  that  under  .section  1002(d)  of  the  PYderal  Aviation  Act  a  zone  of  reason- 
ableness for  fares  is  in  the  public  interest.  Such  a  zone  might  work  either  in 
terms  of  per  se  reasonableness  (meaning  lawful  on  grounds  of  reasonableness 
whatever  the  ca.se),  or  prima  facie  reasonableness  (that  is,  presumed  to  be  law- 
ful on  grounds  of  reasonableness  unless  proven  otherwise).  This  might  also  be 


442 

coupled  with  a  stated  policy  of  giving  less  weight  to  questions  of  alleged  discrim- 
ination, preference,  or  prejudice.  The  zone  might  also  allow  for  broad  variations 
in  price-quality  options,  thereby  giving  market  tests  of  the  preferred  combinations. 

4.  Reform  the  decisionmaking  process.— It  would  enhance  economic  eflSciency 
if  in  the  adversary  process  more  emphasis  were  placed  on  substance  and  less  on 
form.  Also,  it  would  improve  the  quality  of  decisions  if  more  economics  expertise 
were  required  of  administrative  law  judges  and  Board  oppointees.  Finally,  in 
view  of  the  tendency  of  the  Board  to  minimize  squawk,  public  or  private  interest 
advocates  with  economic  efficiency  positions  should  be  encouraged  to  present 
their  case. 

While  the  above  reforms  do  not  exhaust  the  possibilities  feasible  under  exist- 
ing legislation,  they  include  some  of  the  more  important  ones,  and,  if  adopted, 
would  go  far  toward  increasing  the  efficiency  of  airline  markets. 

KEFORMS   REQUIRING   ADDITIONAL   LEGISLATION 

Even  more  substantive  reforms  are  possible  with  new  legislation.  Essentially, 
initial  legislation  setting  up  a  regulatory  agency  specifies  broad  objectives  for 
regulation  and  grants  powers  to  the  regulator  which  ultimately  take  the  form 
of  constraints  on  industry  behavior.  Reform  legislation  typically  can  take  one 
or  more  of  three  directions.  First,  it  might  change  or  identify  more  clearly 
regulatory  objectives ;  second,  it  might  specify  particular  restraints  on  the  in- 
dustry, thus  telling  the  Board  more  clearly  what  to  do ;  or  third,  it  might  prohibit 
certain  previously  imposed  restraints,  thus  telling  the  Board  what  not  to  do.  The 
reforms  described  below  contain  aspects  of  all  three. 

1.  Redefine  public  interest  to  mean  economic  efficiency. — As  described  in  the 
appendix,  the  legislative  "Declaration  of  Policy,"  which  essentially  defines  the 
term  "public  interest"  as  used  in  the  statute,  is  ambiguous  and  contains  mutually 
conflicting  goals,  some  of  which  are  inconsistent  with  economic  efficiency.  A 
simple  legislative  change  which  would  have  an  important  effort  is  replacing  the 
Declaration  of  Policy  with  a  policy  statement  admonishing  the  Board  to  foster 
efficiency  in  airline  markets. 

2.  Separate  promotion  activities  from  economic  regulation. — As  described 
above,  the  Board  has  attempted  to  promote  air  transportation  and  this  has  re- 
sulted in  efficiency  losses.  If  there  are  public-good  aspects  of  the  industry  which 
require  its  artificial  promotion,  then  this  is  better  accomplished  through  other 
means.  For  example,  as  the  Ash  Council  has  recommended,  transfer  the  promo- 
tional activities  of  the  Board  to  the  Department  of  Transportation.  Also,  promo- 
tion, if  it  is  to  exist,  should  be  designed  to  augment  efficiency  in  the  provision  of 
the  subsidized  service.  An  example  is  the  competitive  bidding  scheme  proposed  by 
the  Board  to  assure  service  at  low-density  points. 

3.  Alter  burden  of  proof. — Change  the  Federal  Aviation  Act  to  make  entry 
and  exit  merely  consistent  with  the  public  interest,  rather  than  required  by  it. 
Make  the  approval  of  collusive  agreements  required  by  the  public  interest,  instead 
of  being  "not  inconsistent  with  the  public  interest."  These  changes  arguably  would 
make  entry  and  exit  freer  and  would  restrain  Board  sanctioned  collusion. 

4.  Expand  regulatory  exemptions. — Broaden  the  class  of  exempt  carriers  which 
may  provide  schedule^l  air  service.  This  could  be  at^complished  in  a  number  of 
ways.  First,  grant  commuter  carriers  an  explicit  exemption  and  liberalized 
standards  of  aircraft  size.  Second,  allow  existing  charter  carriers  to  engage  in 
single-ticketed  scheduled  service.  Third,  totally  dereguljite  the  denser  city-pair 
markets.  The  instances  of  inefficiency  under  complete  deregulation  are  likely 
to  be  minimized  the  larger  the  market  size;  also,  the  greatest  efficiency  gains 
from  deregulation  are  likely  to  be  found  in  such  markets. 

5.  Withdraw  or  modify  CAB  power  to  approve  intcrcarrier  agreements. — 
Revise  section  412  of  the  Federal  Aviation  Act  to  eliminate  tlie  power  of  the 
Board  to  circumvent  Iho  antitrust  laws  and  approve  and  enforce  cartel  agree- 
ments. With  possibly  few  exceptions,  agreements  coming  imder  this  provision  for 
the  purpose  of  escaping  antitrust  liability  are  inconsistent  with  maximizing 
industry  performance. 

In  both  explaining  regulatory  behavior  and  in  assessing  the  probability  of 
reform,  discussions  of  economists  usually  touch  a  common  theme :  that  the  firms 
being  regulated,  being  few  in  number  and  having  such  a  large,  perceived  stake 
in  the  legislation  and  policies  of  regulation  carry  an  overwhelming  influence  when 
compared  with  the  consumers,  wliose  numbers  are  immense  but  whose  burdens 
are  ill  perceived  and  spread  thinly.  It  is  my  hope  that  the  hearings  of  this  com- 
mittee may  in  some  measure  redress  this  bias.  Thank  you. 


COMPARISON   OF   UNREGULATED   INTRASTATE   AIR- 
LINES WITH  REGULATED  INTERSTATE  AIRLINES 


FRIDAY,  FEBRUARY  14,  1975 

U.S.  Senate, 
Subcommittee  on  Administrate: 

Practice  and  Procedure  of  the 

Committee  on  the  Judiciary, 

Boston.,  Mass. 
The  subcommittee  met,  pursuant  to  notice,  at  9:45  a.m.,  in  room 
2003A,  JFK  Federal  Building,  Senator  Edward  ^L  Kennedy,  chair- 
man of  the  subcommittee,  presiding. 
Present :  Senator  Kennedy. 

Also  present :  Stephen  Breyer,  special  counsel ;  Philip  Bakes,  as- 
sistant counsel;  Thomas  M.  Susman,  chief  counsel;  and  Stephen  L. 
Jones,  minority  counsel. 

Senator  Kennedy.  The  subcommittee  will  come  to  order. 

OPENING  STATEMENT  OF  SENATOR  KENNEDY 

The  Subcommittee  on  Administrative  Practice  and  Procedure  is  to- 
day continuing  its  hearings  on  Federal  regulation  of  the  airlines  and 
its  effects  on  air  transportation.  The  subcommittee  began  these  hearings 
in  Washington  last  week,  with  representatives  from  various  Govern- 
ment agencies  and  independent  economists  arguing  that  Federal 
regulation  of  airlines  by  the  Civil  Aeronautics  Board  is  costly  and  in- 
efficient. As  one  witness  pointed  out,  while  the  traveler  may  be  pleased 
to  find  the  seat  next  to  him  empty  so  he  can  stretch  out,  he  might  not  be 
as  comfortable  if  he  knew  that  he  was  paying  for  that  empty  seat. 

The  airline  passenger  these  days  can  get  free  drinks  on  coach  or  a 
piano  bar  in  the  lounge.  He  can  fly  a  "yellowbird''  or  other  designer- 
colored  airplanes,  and  can  choose  menus  and  movies.  He  can  "fly  Carol 
to  Miami"  or  content  himself  in  someone  else's  "friendly  skies."  JBut  one 
thing  he  cannot  do  is  fly  cheaply.  He  may  choose  between  airlines,  but 
he  cannot  choose  between  air  fares.  A  lot  of  people  believe  that  the 
Federal  Government  is  responsible.  And  they  may  be  right. 

The  Civil  Aeronautics  Board  regulates  air  fares.  These  have  been 
skyrocketing  in  recent  years  and  continue  upward.  Some  economists 
have  estimated  that  air  fares  presently  average  32— iT  percent,  and  in 
some  cases  100  percent,  higher  than  they  would  be  without  CAB 
regulation. 

For  Boston  residents,  that  could  mean  flights  to  Xew  York  for  $15 
instead  of  $28,  to  Washington  for  $21  instead  of  $45,  and  to  Los  Angeles 
for  $90  instead  of  $188. 

The  CAB  also  regulates  the  entry  of  new  airlines  into  the  market- 
place. But  the  CAB  often  delays  action  on  requests  by  existing  carriers 
to  serve  new  routes.  And  it  generally  discourages  or  refuses  to  act  on 
applications  by  new  airlines  to  begin  new  service.  As  a  result,  not  one 
new  trunk  airline  has  started  operation  since  1938,  while  the  number 
of  major  carriers  has  actually  decreased  because  of  mergers. 

(443) 


444 

The  people  of  Massachusetts  know  this.  Northeast  Airlines  merged 
with.  Delta  3  years  ago.  Service  has  been  cut  back  to  many  areas  of 
the  State.  We  are  especially  fortunate,  however,  to  be  in  one  of  the 
few  areas  of  the  country  receiving  new  service,  from  Air  New  Eng- 
land. In  the  current  climate  of  Federal  regulation,  though,  the  future 
holds  no  special  promise  for  a  bright  young  innovative  competitor  in 
the  airline  business.  For  competition  seems  to  be  a  word  missing  from 
the  CAB's  dictionary. 

We  will  also  ask  the  regulated  airlines  who  fly  the  Northeast 
whether  they  have  considered  this  question — whether  they  could  pro- 
vide the  kind  of  low-price  service  that  PSA  and  other  State  airlines 
provide  in  other  parts  of  the  country. 

This  subcommittee  began  its  investigation  of  the  CAB  as  a  first 
step  in  the  regulatory  reform  process.  I  was  pleased  to  see  that  in  our 
hearings  last  week,  the  administration  responded  to  our  efforts,  and 
has  promised  to  develop  and  support  a  legislative  reform  package.  We 
will  continue  these  efforts  in  future  hearings. 

The  difference  between  low  air  fares  and  high  air  fares  should  not 
be  the  difference  between  the  absence  and  presence  of  Federal  regula- 
tion. If  it  is,  then  we  must  be  prepared  to  overhaul  regulation  and 
make  it  more  responsive  to  the  citizens  it  is  intended  to  serve. 

Our  first  witnesses  this  morning  will  be  Kobert  W.  Clifford  and 
Lawrence  Guske. 

Mr.  Clifford  has  spent  over  25  years  of  his  career  experience  in 
airline  management,  and  he  is  now  president  of  Air  California. 

Mr.  Lawrence  Guske,  is  assistant  controller  of  Pacific  Southwest 
Airlines  and  has  appeared  as  witness  for  Pacific  Southwest  Airlines 
in  several  hearings  before  the  California  Public  Utilities  Commission. 

STATEMENTS  OF  LAWRENCE  A.  GUSKE,  ASSISTANT  CONTROLLER, 
PACIFIC  SOUTHWEST  AIRLINES,  AND  ROBERT  W.  CLIFFORD, 
PRESIDENT,  AIR  CALIFORNIA 

IMr.  Guske.  Would  you  like  for  me  to  read  my  statement? 

Senator  Kennedy.  No,  maybe  just  highlight  it  in  2  or  3  minutes,  if 
you  could  do  that  for  us. 

Mr.  Guske.  Essentially  some  background  on  PSA,  we  serve  only 
in  the  State  of  California.  We  serve  the  Stat«  with  jet  aircraft.  We 
carry  approximately  6.4  million  passengers  a  year.  Our  current  fares 
in  our  primary  markets  average  approximately  5.68  cents  per  revenue 
passenger-mile.  AVe  have  currently  pending  before  the  Public  Utilities 
Commission,  by  which  we  are  regulated  as  to  fares  and  markets,  an 
increase  which  would  bring  those  primary  market  fares  up  to  approxi- 
mately 6.3  cents  per  mile.  We  currently  serve  32  city-pairs  in  the  State 
of  California. 

I  think  that  summarizes  who  PSA  is  and  the  type  of  service  we 
provide. 

psa's  "no-frills"  service 

Senator  Kennedy.  I  have  had  a  chance  to  review  the  rates  that  are 
charged  by  PSA  and  allowed  by  the  CAB.  Why  do  you  think  you 
are  able  to  charge  a  good  deal  less  than  regulated  air  service  carriers  ? 


445 

Mr.  GusKE.  Actually,  in  the  State  of  California,  the  CAB  carriers 
that  compete  with  us  have  the  same  fares  that  we  do.  But  as  far  as 
going  to  the  point  of  fares,  in  and  of  themselves,  I  think  it  can  be 
attributed  to  several  factors.  We  try  to  keep  our  overhead  as  low  as 
we  possibly  can.  The  type  of  service  we  offer  is  no-frills  type  service. 

Senator  Kennedy.  What  do  you  mean  by  "no  frills?" 

]Mr.  GusKE.  We  do  not  have  food  service. 

Senator  Kennedy.  Do  people  not  demand  that? 

Mr.  GusKE.  No,  our  flights  are  generally  very  short,  approximately 
an  hour. 

Senator  Kennedy.  Sort  of  like  New  York  to  Washington  ? 

Mr.  GusKE.  I  think  it  would  be  somewhat  similar.  I  am  not  familiar 
with  that  market. 

We  have  no  free  alcoholic  beverages.  We  have  high-density  seating 
on  our  aircraft,  and  we  have  a  general  policy  of  no  discounting  of 
our  fares.  We  do  not  have  military  fares  or  excureion  fares  and  such 
like  that.  The  only  discount  fares  are  for  children  under  the  age  of 
12,  and  that  is  it. 

I  think  that  factor,  and  then  our  ability  to  generate  passengers  with 
a  friendly  type  of  service,  which  is,  the  more  passengers,  the  more 
you  can  hold  down  your  costs  to  the  extent  of  being  able  to  spread 
them  over  more  passengers  and  so  on. 

Senator  Kennedy.  Do  you  think  it  is  completely  coincidental,  that 
even  the  certified  carriers  operating  in  competition  with  you  in  the 
intrastate  market,  charge  about  close  to  half  of  what  the  CAB  formula 
is  and  just  about  what  yours  is?  They  do  that  in  California  and  in 
Texas,  hut  they  do  not  do  it  in  other  parts  of  the  countrv.  Why  do  you 
think  they  do  that  ? 

Mr.  GusKE.  I  really  could  not  speculate  on  other  parts  of  the  coun- 
try. As  far  as  the  State  of  California  is  concerned,  the  fares  are  regu- 
lated by  the  Public  Utilities  Commission  and  at  this  point  they  have 
designated  PSA  as  the  most  efficient  fare  setting  carrier  in  the  State, 
and  that  has  been  their  policy  that  whatever  fares  they  authorize  for 
PSA  they  will  also  grant  to  CAB  carriers.  Since  they  do  regulate  the 
fares,  that  has  a  controlling  interest  to  an  extent. 

Senator  Kennedy.  Do  you  think  competition  has  anything  to  do 
with  these  lower  fares? 

Mr.  GusKE.  Again,  I  cannot  speak  for  those  carriers,  but  I  think 
that  would  be  a  definite  consideration  of  theirs  in  trying  to  meet 
competition. 

Senator  Kennedy.  AVhat  you  are  saying  then  is  that  you  provide 
more  seats  in  the  plane  and  no  food  or  beverages.  Besides  the  courteous 
services  that  you  extend,  you  are  able  to  charge  less  for  the  miles  that 
will  be  carried,  and  that  this  concept  or  idea  has  been  endorsed  by  the 
people  traveling  your  airline. 

Mr.  GusKE.  Yes,  sir. 

possible  EXPANSION  BY  PSA  OUTSIDE  CALIFORNIA 

Senator  Kennedy.  Would  you  like  to  fly  outside  of  California  ? 

Mr.  GusKE.  Yes,  we  would.  We  currentlv  have  pretty  much  been 
serving  the  major  markets  in  California.  There  is  not  much  left  for 
us  to  expand  into.  As  far  as  our  future  goes,  we  would  be  very  inter- 
ested in  flying  outside  the  State. 


446 

Senator  Kennedy.  Why  do  you  not  ? 

Mr.  GusKE.  We  have  no  application  on  file  currently  with  the  Civil 
Aeronautics  Board,  which  may  have  jurisdiction  in  that  matter,  and 
we  are  not  certificated  bv  the  Civil  Aeronautics  Board  at  this  point. 

Senator  Kennedy.  If  you  would  like  to  fly  outside  California,  what 
are  the  reasons  you  are  not  making  application  to  do  so  ? 

Mr.  GusKE.  Well,  we  have  not  completed  the  necessary  studies  and 
so  forth,  which  would  be  a  prerequisite  to  filing  applications  or  seeking 
additional  routes. 

Senator  Kennedy.  Has  there  ever  been  a  cost  study  done  in  an  effort 
to  find  out  why  you  provide  services  more  cheaply  thrai  we  do  in  the 
East? 

INIr.  Guske.  Not  that  I  am  aware  of. 

Senator  Kennedy.  You  are  not  familiar  with  the  CAB  study  of 
1966? 

Mr.  Guske.  I  am  not. 

Senator  Kennedy.  Do  you  think  customers  prefer  the  no-frills  serv- 
ice you  provide  for  short  flights  more  than  the  C AB-type  of  service  ? 

Mr.  Guske.  Well,  all  I  can  say  is  that  our  passengers  appear  to 
accept  our  services  and  they  come  back,  and  we  have  shown  over  the 
years  considerable  growth  "in  our  passenger  total,  so  we  believe  our 
service  is  very  well  accepted. 

AIR  CALIFORNIA 

Senator  Kennedy.  Mr.  Clifford  could  you  tell  us  a  little  about  the 
situation  in  California  ? 

INIr.  Clifford.  Senator,  our  situation  is  slightly  different  from 
PSA's.  Ours  is  a  California  carrier,  and  have  grown  extremely  fast. 
We  carried  1.4  million  customers  in  1974.  We  have  been  in  business 
since  1967. 

Our  primary  entry  into  the  business  was  not  in  a  competitive  nature 
rather  than  new  services  that  our  people  felt  were  necessary  in  survey- 
ing the  markets  Avithin  California. 

So  our  fares  are  slightly  higher  than  PSA's.  Our  average  fare  is  6.4 
cents  a  mile.  Twelve  of  our  19  markets  are  in  fact  noncompetitive  in 
nature,  if  you  will,  having  started  from  markets  that  were  not  previ- 
ously served. 

We  compete  in  five  markets,  and  the  fares  that  we  cliarge  are  com- 
parable to  the  other  scheduled  carriers  in  those  markets,  primarily, 
because  the  Public  Utilities  Commission  grants  fares  throughout  the 
State  of  California  on  all  intrastate  routes. 

Senator  Kennedy.  What  do  you  charge  to  fly  from  Orange  County 
to  San  Francisco,  or  San  Diego  to  Oakland  ? 

]Mr.  Clifford.  $24.30,  Senator. 

Senator  Kennedy.  And  the  flight  from  Boston  to  Washington  is  just 
about  as  far,  is  it  not  ? 

Mr.  Clifford.  I  am  not  sure. 

Senator  Kennedy.  How  many  miles  is  it  ? 

Mr.  Clifford.  From  Orange  County  to  San  Francisco  it  is  344  miles. 

CX)NTRAST  between   AIR    CALIFORNIA'S   FARES   AND   CAB  FARES 

Senator  Kennedy.  Boston  to  Washington  is  399,  and  it  costs  almost 
twice  as  much.  How  can  you  fly  more  cheaply  ? 


447 

j\Ir.  Clifford.  Well.  I  believe  there  are  three  basic  reasons  why  Air 
California  flies  more  cheaply.  One,  Ave  are  blessed  in  California  with 
some  weather  circumstances  and  conditions  that  favor  us,  and  having 
been  an  east  coast  operator,  I  am  aware  of  the  weather  problems  that 
are  involved  and  would  require  higher  fares. 

We  are  a  younger  airline,  and  our  employees — although  we  pay 

standard  rates,  if  you  will 

Senator  Kennedy.  Do  you  know  that  the  Boston-Washington  route 
completes  98.2  perceiit  of  their  flights  ? 
Mr.  Clifford.  We  complete  99.8. 

Senator  Kennedy.  Is  there  much  difference  between  98.2  and  99.8 
percent  in  terms  of  real  cost  savings  ? 

Mr.  Clifford.  I  would  not  have  a  judgment,  Senator.  We  fly  higher 
load  factors.  Our  break-even  load  factor  is  at  this  point  65  percent.  So 
we  gear  our  fares  for  what  we  believe  we  can  attain  in  load  factor,  and 
have  been  successful  in  that  degree. 

Senator  Kennedy.  In  other  words,  you  feel  that  by  charging  the 
loAver  prices,  you  can  get  more  people  on  a  flight  and  make  a  profit  on 
that  basis  ? 

Mr.  Clifford.  Yes,  sir. 

Senator  Kennp:dy.  Has  that  been  your  experience  ? 
INIr.  Clifford.  Yes,  sir,  we  try  to  gage  our  prices  to  a  break-even 
load  factor  that  is,  in  fact,  attainable. 
Senator  Kennedy  What  type  of  planes  does  PSA  fly  ? 
Mr.  Clifford.  Boeing  737's. 

Senator  Kennedy.  How  many  seats  do  you  have  in  the  plane  ? 
Mr.  Clifford.  We  have  the  same  number  of  seats  as  the  Hawaiian 
carriers.  I  believe  more  seats  than  the  737  domestic  operators. 

Senator  Kennedy.  Do  you  think  you  could  provide  the  same  sort  of 
inexpensive  service  outside  of  California  ? 
Mr.  Clifford.  Yes,  sir. 
Senator  Kennedy.  Would  you  like  to  do  so  ? 
Mr.  Clifford.  Yes,  sir. 

We  have  no  current  applications.  We  were  applicants  in  the  Pacific- 
Xorthwest  case  some  years  ago.  That  has  been  our  only  entry  into 
trying  to  fly  interstate. 

Senator  Kennedy.  What  happened  in  that  case  ? 
Mr.  Clifford.  We  were  not  a  successful  applicant. 
Senator  Kennedy.  Do  you  know  why  ? 

Mr.  Clifford.  Not  precisely,  but  t4iere  Avere  public  hearings,  and  the 
discussions  AA'ere  made  Avithout  us  being  successful. 

Senator  Kennedy.  If  you  Avould  like  to  serA'e  other  places,  Avhat 
i-eally  stops  you  ? 

Mr.  Clifford.  An  analysis  on  our  part  as  to  the  potential  success  of 
application  and  ability  to  serve  in  a  precise  market. 

Senator  Kennedy.  \Vould  you  elaborate  a  little  on  that? 
Mr.  Clifford.  Well,  prior  to  application  into  any  ncAV  market  Ave 
AA-ould  do  an  analysis  Avith  the  competiti\'e  services  that  were  then 
uA-ailable  and  Ave  Avould  apply  only  if,  in  our  judgment,  AA-e  saw  a  real 
need  and  requirenient  for  additional  services  Avithin  the  route. 

We  do  not  consider  ourseh-es  a  cutrate  airline,  and  it  Avould  not  be 
our  policy  and  philosophy  to  look  at  a  route  and  try  to  steal  passengers, 
if  you  Avill,  from  another  carrier,  but  rather  Ave  AAOuld  app>ly  for  the 


448 

route,  if  in  our  judgment,  additional  customers  were  potentially  avail- 
able in  that  route. 

Senator  Kennedy.  I  understand  that  the  CAB  says  that  the  Cali- 
fornia routes  are  cheaper  because  one  of  the  reasons  is  they  are  denser, 
and  they  have  more  passengers.  There  are  about  2  million  passengers 
flying  between  Boston  and  Washington  each  year,  one  way.  How  many 
passengers  fly  between  Orange  County  and  San  Francisco  ? 

Mr.  Clifford.  I  believe  a  million — I  think  I  have  a  figure— Orange 
County  to  San  Francisco  is  321,000  customers  in  1973.  Orange  County 
to  San  Jose  were  276,000,  approximately.  Orange  County 

Senator  Kennedy.  At  least  with  regards  to  the  issue  of  the  denser 
being  cheapei',  the  Boston-Washington  route  carrying  2  million  versus 
Orange  County  to  San  Francisco  or  San  Jose  with  approximately 
300.000,  that  does  not  seem  to  be  a  substantial  issue. 

Likewise,  the  98.2  percent  versus  99.8  percent  flight  completions 
seems  to  be  a  very  narrow  variable.  What  are  the  other  considerations  ? 

Mr.  Clifford.  Senator,  I  am  not  sure  whether  the  completion  factor 
really  tells  the  whole  story  on  the  weather  as  a  factor.  There  are  delays 
enroute  because  of  dense  traffic,  and  long  holds,  and  so  on,  that  cer- 
tainly would  be  a  cost  factor  in  this  regard. 

I  am  not  sure  what  services  are  offered  in  the  eai-n  sector  with  regard 
to  food  service  and  so  on. 

CAB    denial    of    authority    FOR    INTRASTATE    CARRIERS    TO 
INTERLINE    WITH    CAB    CARRIERS 

Senator  Kennedy.  If  you  want  to  fly  from  Boston  to  San  Francisco 
to  Orange  County,  could  you  buy  a  ticket  in  Boston  to  do  that  ? 

Mr.  Clifford.  No,  sir;  you  cannot.  We  would  like  to  interline  bag- 
gage and  interline  passengers  for  truly  intrastate  operations  on  a  break 
of  your  trip,  if  you  will,  if  you  were  planning  on  spending  li/^  days  in 
San  Francisco,  and  traveling  to  Orange  County.  We  have  applied  for 
such  services  and  ai-e  not  able  to  oft'er  that. 

Senator  Kennedy.  Why  have  you  not  been  able  to  get  it  ? 

Mr.  Clifford.  Well,  there  is  the  question  of  inter--  versus  intra-state 
carriage,  common  carriage  of  customers. 

Senator  Kennedy.  Well,  what  happened  to  the  applications? 

Mr.  Clifford.  The  application  was  denied. 

Senator  Kennedy.  By  whom  ? 

Mr.  Clifford.  By  the  Civil  Aeronautics  Board. 

Senator  Kennedy.  For  what  reasons? 

Mr.  Clifford.  I  am  really  not  familiar  witli  that  portion  of  the  case, 
Senator. 

Senator  Kennedy.  You  mentioned  a  little  earlier  that  you  would 
not  want  to  enter  a  market  at  a  cutrate  to  get  passengers  who  already 
fly  on  another  line.  Is  this  the  usual  businessman's  attitude  toward 
competition  ? 

Mr.  Clifford.  Xo,  but  it  is  a  very  straightforward  attitude  of 
making  sure  thei-e  is  enough  market  to  make  the  load  factor  that  is 
necessary  in  order  to  flv,  a  practical,  attainable  load  factor. 

Senator  Kennedy.  What  would  happen  otherwise  ? 

Ml-.  Clifford.  Well,  if  we  needed  65  percent  to  break  even,  and  we 
got  55  percent  we  would  lose,  and  we  liave  no  place  to  go  except  as  a 
lost  venture.  Of  course,  we  want  to  avoid  that  prospect. 


449 

Senator  Kexxedy.  But  then  yon  wonld  not  be  reluctant  to  enter  this 
market  if  you  thought  you  could  maintain  a  65  percent  load  factor? 

Mr.  Clifp^ord.  No,  sir. 

Senator  Kennedy.  Would  you  enter  it  at  the  cutrate  ? 

Mr.  Clifford.  Yes,  sir. 

Senator  Kennedy.  Thank  you  very  much.  I  appreciate  your  coming. 

Mr.  Clifford.  Thank  you. 

[The  prepared  statements  of  Lawrence  Guske  and  Kobert  Cliflford 
follow :] 

Prepared  Statement  of  Lawrence  A.  Guske,  Assistant  Controller, 
Pacific  Southwest  Airlines 

We  understand  the  focus  of  today's  session  to  be  on  costs  and  fares  in  rela- 
tively short-haul,  dense  airline  passenger  markets.  We  hope  that  PSA's  par- 
ticipation will  assist  the  subcommittee  in  pursuing  its  interest  in  this  important 
area. 

PSA  commenced  scheduled  airline  service  on  May  6,  1949,  between  San  Diego 
and  Oakland  via  Hollywood-Burbank,  utilizing  one  leased  DC-3  aircraft.  At 
present,  PSA  provides  single-plane  service  in  32  airport  pairs  using  three  Boeing 
737-200  aircraft  with  11.5  seat«,  twenty  Boeing  727-200  aircraft  with  159  seats, 
one  Boeing  727-100  with  128  seats  and  two  Lockheed  1011  aircraft  with  297 
seats. 

In  expanding  and  developing  from  1949  to  the  present,  PSA  has  consistently 
sought  to  provide  good  air  transportation  service  at  the  lowest  possible  fares. 
PSA  believes  that  the  air  passenger  market  is  price  elastic.  In  addition  to 
pioneering  in  the  area  of  fares,  PSA  has  concentrated  much  attention  on  develop- 
ment of  traffic  at  the  California  satellite  airports  of  Burbank,  Oakland,  San 
Jose,  Ontario  and  Long  Beach.  Without  the  satellite  operations,  airport  limita- 
tions and  congestion  would  have  posed  serious  constraints  to  the  expansion  of 
PSA's  low  fare  service  for  the  traveling  public. 

While  we  know  that  low  fares  increase  traffic,  PSA  has  not  been  able  to 
isolate  and  relate  particular  traffic  increases  to  particular  fare  offerings.  Ex- 
amples of  market  stimulation  which  can  be  attributed  in  part  to  PSA's  lower 
fares  are  as  follows  : 

1.  In  1965,  Pacific  Airlines,  the  only  carrier  providing  single-plane  service 
between  Los  Angeles  and  San  Jose,  carried  56,000  pasengers  in  that  market. 
In  May  1966,  PSA  commenced  lower-fare  service  between  Los  Angeles  and 
San  Jose  and  for  calendar  year  1967,  PSA  carried  556,919  passengers  for 
a  two-year  increase  of  nearly  1,000  iiercent. 

2.  In  196(),  only  Western  and  United  provided  jet  service  between  Los 
Angeles  and  Sacramento.  In  February  1967,  PSA  entered  the  market  with 
a  fare  level  approximately  25  percent  below  the  existing  fares.  In  1967, 
passenger  traffic  over  the  route  doubled,  and  Western  and  United  actually 
carried  more  passengers  than  in  1966,  despite  the  competition  from  PSA. 

PSA  has  historically  exercised  tight,  austere  controls  over  its  costs.  Four 
important  areas  where  this  has  been  done  are  : 

1.  Overhead.  PSA  employs  tight  expense  controls  and  efficient  flight  and 
ground  crew  practices.  It  has  only  five  top  corporate  officers. 

2.  Basic  transportation  service.  PSA  serves  no  food  or  free  alcoholic 
beverages. 

3.  High  seating  density.  PSA's  single-class  configurations  of  the  aircraft 
it  operates  are  about  20  percent  denser  than  those  of  interstate  airlines. 

4.  No  discounts.  PSA  has  offered  half -fa  re  for  children  2  to  12,  but  almost 
no  other  discounts.  As  a  result,  PSA's  system  fare  dilution  is  only  2  percent. 

Tight  cost  control  is  still  effective,  we  believe,  to  keep  PSA's  total  costs  below 
•those  of  other  carriers  on  a  passenger-mile  basis,  but  PSA's  costs  are  rising,  in 
common  with  those  of  the  entire  airline  industry,  at  an  alarming  rate.  PSA's 
fuel  costs  are  among  the  highest  in  the  nation.  From  14.4  cents  per  gallon  at 
the  end  of  1973.  PSA's  average  price  for  a  gallon  of  fuel  soared  to  31.2  cents  as 
of  November  1974,  and  we  anticipate  a  cost  of  46  cents  by  the  end  of  1975  under 
the  Administration's  crude  oil  program.  At  such  a  level,  1975  fuel  costs  would 
amount  to  $47  million  or  29.4  percent  of  PSA's  total  costs  of  airline  operation, 
compared  with  $14,396,000  and  14  percent  of  expenses  in  1973.  Although  fuel 


450 

prices  are  the  leading  factor  in  PSA's  cost  increases,  PSA  is  also  subject  to  the 
same  inflationary  pressures  that  afflict  the  entire  nation  over  the  entire  range 
of  its  costs. 

PSA  is  subject  to  competition  by  interstate  carriers  over  most  of  its  system. 
PSA's  primary  competitor,  United,  has  consistently  matched  PSA's  fares.  Until 
very  recently,  most  other  competing  airlines  published  fares  equal  to  PSA 
over  route  segments  served  in  common.  In  past  route  and  fare  proceedings  before 
the  California  Public  Utilities  Commission,  these  competing  airlines  have  intro- 
duced evidence  which  indicated  that  they  were  incurring  substantial  losses  charg- 
ing PSA's  fares  for  their  intra-Calif ornia  services. 

PSA's  services  have  over  the  years  yielded  a  profit,  but  a  return  on  investment 
of  only  1.06  percent  for  1973 — an  inadequate  return  even  under  California  PUC 
ratemaking  standards.  Substandard  profitability  for  PSA  along  with  losses  for 
all  competing  carriers  are,  unfortunately,  consistent  with  the  California  PUC's 
ratemaking  approach.  The  California  PUC  has  declared  PSA  to  be  the  rate- 
making  carrier  in  the  principal  California  intrastate  air  transportation  markets, 
on  the  ground  that  PSA  is  most  efficient.  As  a  result,  once  rate  increases  are 
granted  to  PSA  after  a  full  hearing,  such  increases  are  perfunctorily  awarded 
to  the  other  air  carriers  on  request,  on  the  basis  of  PSA's  relatively  low-unit 
costs  rather  than  market  or  industry  costs  or  the  particular  other  carrier's  costs. 
The  California  PUC  has  used  a  number  of  other  ratemaking  techniques  which 
we  at  PSA  have  opposed  as  unsound  and  as  calculated  to  prevent  PSA,  in  spite 
of  its  austere  cost  management  and  high  eflSciency,  from  earning  a  fair  return 
on  investment.  As  a  result  of  such  nearsighted  ratemaking  techniques,  PSA's 
public  shareholders  have  received  no  cash  dividends  from  1970  to  present. 

PSA's  present  fare  between  Los  Angeles  and  San  Francisco  before  tax  is  $19.21, 
or  5.68  cents  per  mile.  We  have  pending  with  the  California  PUC  a  request  for 
increase  to  cover  general  cost  increases,  not  fuel,  which  would  increase  the  fare 
to  $21.30,  or  6.30  cents  per  mile. 

The  fact  that  we  are  asking  the  PUC  for  a  fare  of  6.30  cents  per  mile  does  not 
mean  that  PSA  has  stopped  being  a  low-fare  carrier.  We  still  are  dedicated  to  the 
lowest  compensatory  fares.  While  we  are  asking  for  0.30  cents,  the  Eastern  air- 
shuttle  fares  between  New  York,  on  the  one  hand,  and  Boston  and  Washington 
on  the  other,  are  14.02  cents  and  12.98  cents  per  mile  respectively,  and  the  lowest 
regular  Boston-Washington  fare  is  10.44  cents  per  mile. 

The  most  recent  development  in  the  California  intrastate  fare  arena  is  that 
several  interstate  carriers  now  offer  lower  fares  than  PSA  in  principal  markets. 
This  came  about  in  1974,  when  PSA  was  forced  to  raise  fares  on  all  its  routes  to 
compensate  for  the  increased  price  of  jet  fuel.  Although  in  the  past,  the  interstate 
carriers  have  normally  raised  their  intra-California  fares  to  match  those  of  PSA, 
some  carriers  did  not  do  so  in  this  instance.  As  a  result.  Delta  offers  the  lowest 
fare  between  Los  Angeles  and  San  Diego ;  Hughes  Airwest  the  lowest  between 
Los  Angeles  and  San  Francisco,  and  Continental  is  offering  a  lower  fare  between 
Burbank  and  San  Jose. 

PSA  continues  as  a  proponent  of  low  airline  fares.  Today,  however,  PSA  is 
faced  with  an  unprecedented  onslaught  of  deterrents  to  continuation  and  expan- 
sion of  the  availability  to  the  public  of  such  fares.  Rampant  inflation  led  by  fuel 
prices  unimaginable  two  years  ago,  a  slumping  economy,  an  inadequately  re- 
sponsive state  regulatory  agency,  and  competitors  who  for  the  first  time  are 
using  fares  as  an  offensive  weai)on  against  PSA,  have  all  converged  to  challenge 
the  continuation  of  PSA's  traditional  role  as  the  low  fare,  intrastate  airline. 
The.se  are  matters  PSA  feels  should  be  kept  in  mind  both  in  comparing  intra- 
California  airline  markets  and  fares  with  markets  and  fares  elsewhere  in  the 
country,  and  in  devi.sing  solutions  to  the  administrative  problems  faced  by  the 
carriers  and  the  traveling  public. 

Prepared  Statement  of  Robert  W.  Clifford,  President,  Air  California 

My  name  is  Robert  W.  Clifford.  I  am  the  president  of  Air  California,  and  we  are 
pleased  to  appear  before  you.  Air  California  is  a  scheduled  air  carrier  operating 
within  the  State  of  California  under  a  certificate  of  convenience  and  necessity 
issued  by  the  Public  Utilities  Commission,  the  agency  which  regulates  the  public 
utilities  and  transportation  services  within  Calf  ornia.  We  provide  passenger  and 
airfreight  services  to  eight  California  cities  constituting  19  city-pair  markets. 
Air  California  was  incorporated  in  1966  to  provide  initial  air  .service  between 
Orange  County  and  the  San  Francisco  bay  area.  The  company  has  grown  from 


451 

an  airline  operating  two  Lockheed  Electras  (Lr-188)  and  transporting  293.000 
annual  passengers  in  1967  to  the  operation  of  seven  Boeing  737-115  passenger 
jets  and  one  Electra  serving  1.4  million  customers  in  1974. 

The  corporate  mission  of  the  company  is  to  provide  low-cost  commuter-type  air 
.service  in  markets  that  do  not  have  required  service  or  receive  poor  and  inade- 
quate .service  from  interstate  airlines.  Of  the  19  markets  presently  served  by  Air 
California,  12  received  first  time  service  from  Air  California,  2  received  better 
service,  and  5  received  competitive  service.  The  State  of  California  is  to  be 
admired  for  its  foresight  in  recognizing  the  need  for  intrastate  air  transportation 
and  enacting  legislation  which  established  an  orderly  control  mechanism  for 
route  authorities,  tariffs,  and  financial  guidelines.  California,  if  it  were  a  nation, 
would  indeed  be  the  eighth  largest  economic  producer  (gross  national/state 
product)  in  the  world,  so  it  naturally  follows  that  communication  and  transporta- 
tion are  vital  and  dramatically  necessary  in  an  ever-changing  way. 

The  Public  Utilities  Commission  has  been  responsive  in  the  recognition  of  new 
service  route  needs,  and  has  been  able  to  meet  such  needs  through  tlie  avail- 
ability of  two  rather  large,  viable,  and  competent  transportation  companies.  Air 
California  and  PSA.  The  existence  and  growth  of  our  companies  is  adequate  and 
strong  testimony  as  to  the  need  for  services  of  the  type  offered  and  the  good  judg- 
ment of  our  regulators.  Tliere  is  no  question  in  my  mind  that  services  of  the 
type  we  provide  which  are  quickly  responsive  to  new  market  needs  and  priced  in 
innovative  packages  which  develop  markets  with  maximum  speed  would  not  be 
possible  in  the  framework  of  present  interstate  certification  processes. 

Our.s  is  an  operation  in  which  fares  are  priced  at  minimum  levels  which  can  be 
realistically  supported  by  expected  load  factors.  We.  like  all  other  air  carriers, 
are  currently  caught  in  a  pinch  because  of  fuel  prices.  Although  the  Commission 
has  been  attentive  to  the  fuel  price  increase,  the  additional  19  percent  in  our  fares 
has  somewhat  depressed  trafBc.  In  comparison  to  other  airlines,  intrastate  and 
interstate,  our  fares  are  in  some  instances  lower  and  in  some  instances  slightly 
higher.  Our  fares  are  lower  than  Hughes  Airwest,  however  slightly  higher  than 
Continental,  Western  and  PSA  in  our  Ontario  to  Sacramento  service.  In  order  to 
encourage  discretionary  travel.  Air  California  offers  and  is  highly  supportive  of 
reduced  rate  incentives.  We  offer  a  discounted  family  plan,  military  fare,  group 
rates,  and  a  standby  E-z  fare  (20  percent  reduction  on  certain  selected  low 
volume  flights). 

Our  operating  costs  are  somewhat  lower  than  the  interstate  carriers  since  we 
are  relatively  a  new  carrier  and  our  seniority  rates  are  not  as  mature  as  others. 
The  price  of  our  supplies,  including  fuel,  spare  parts,  miscellaneous  equipment, 
oflSce  supplies,  etc.,  are  probably  comparable  to  those  of  other  air  carriers. 

We  don't  look  upon  ourselves  as  a  cutrate  airline  for,  in  fact,  we  charge  fares 
that  permit  a  fair  level  of  profitability  potential  and  offer  services  which  are 
comparable  to  those  of  any  air  carrier  operating  .short  segment  flights  .similar 
to  ours.  We  require  a  relatively  high  load  factor  for  breakeven  and  we  maintain 
these  load  factors  by  effective  scheduling  of  individual  flights  on  daily  schedules 
which  match  peak  demand.  That  is,  we  schedule  more  trips  on  days  which  pro- 
vide higher  traffic  i>otential  (Fridays,  holidays,  etc.),  and  contract  .schedules  on 
days  of  expected  minimum  activity,  i.e.,  Saturdays,  day  after  holiday,  etc.  We  are 
able  to  control  capacity  through  the  use  of  our  modern,  computerized  reserva- 
tion .system  which  utilizes  the  data  bank  of  Continental  Air  Lines. 

Our  type  of  operation,  which  is  based  npon  high  frequency  on  short  flight  seg- 
ments, requires  close  adherence  to  published  flight  schedules.  The  maximum 
possible  completion  of  our  scheduled  trips  on  time  is  a  constant  concern.  Our 
completion  factor  for  the  year  1974  was  outstanding — 99.8  percent  with  89.2  per- 
cent of  the  flights  operating  on  time   (within  15  minutes). 

Although  our  intrastate  customers  enjoy  a  high  level  of  service  proficiency, 
we  are  not  able  to  offer  interline  ticketing  or  interline  baggage  exchange.  This 
deficiency  is  brought  about  by  the  possibility  of  our  being  con.sidered  an  inter- 
state carrier  if  such  service  was  offered.  On  two  occasions  we  have  requested 
Civil  Aeronautics  Board  is.suance  of  an  exemption  to  permit  interlining  of 
baggage  and  tickets  with  stated  restrictions  which  would  negate  the  possibility 
of  straight-through,  direct  interstate  commerce.  We  understand  the  technical 
regulatory  problems  involved  in  the  consideration  of  this  matter;  however,  we 
believe  that  the  traveling  public  would  be  best  served  through  the  adoption  of  a 
plan  which  would  offer  our  services  for  trips  which  were  not,  in  fact,  interstate 
in  nature. 

Transportation  services,  in  order  to  be  effective  and  of  value,  must  meet  the 
needs  of  the  people  they  serve.  These  needs  are  not  static,  but  rather  ever-chang- 


452 

ing.  We  believe  the  ingenuity  and  flexibility  brought  to  the  air  transportation 
industry  by  carriers  such  as  Air  California  should  be  recognized  as  beneficial  and 
that  the  continued  expansion  of  their  services  should  be  encouraged. 

We  are  proud  to  be  a  member  of  an  industry  which  provides  services  which 
are  so  vital  to  our  national  economy  and  well-being. 

We  thank  you  again  for  the  opportunity  to  appear  before  you  and  would  be 
pleased  to  answer  any  questions  which  would  be  of  benefit  in  your  consideration 
of  these  matters. 

Senator  Kennedy.  The  next  testimony  will  be  from  Dr.  William  A. 
Jordan,  professor  of  managerial  economics  at  York  University,  To- 
ronto, Canada ;  and  Dr.  John  R.  Summerfield,  president  of  Summer- 
field  Associates,  a  transportation  research  and  consulting  firm. 

During  the  past  27  years,  Dr.  Jordan  has  worked  for  Scandinavian 
Airlines  System,  Air  France,  Seaboard  World  Airlines,  and  Western 
Airlines.  Dr.  Jordan  has  consulted  on  airline  and  airport  matters.  He 
has  taught  graduate  courses  in  economics  and  government  regulation 
at  Columbia,  Stanford,  Northwestern,  U.S.  International,  and  York 
University,  and  he  is  a  colonel  in  the  Air  Force  Reserve.  Dr.  Jordan 
is  well  known  for  his  publications  on  airline  regulation  and  capacity 
agreements. 

Dr.  Summerfield  has  directed  transportation  research  at  the  RAND 
Corp.  and  has  served  as  corporate  economist  and  director  of  economic 
studies  at  Douglas  Aircraft  Co.  and  as  vice  president  of  economic 
planning  at  Western  Airlines  and  Pan  American  World  Airways. 

Dr.  Jordan,  do  you  want  to  start,  please  '^. 

STATEMENTS  OF  DR.  WILLIAM  A.  JORDAN,  PROFESSOR  OF  MAN- 
AGERIAL ECONOMICS,  YORK  UNIVERSITY  AND  DR.  JOHN  R. 
SUMMERFIELD,  PRESIDENT,   SUMMERFIELD  ASSOCIATES 

Dr.  Jordan.  Thank  you. 

My  presentation  today  is  based  on  research  for  the  past  10  years  on 
the  effects  of  CAB  regulation.  Rather  than  attempt  a  theoretical  study, 
I  decided  the  best  way  to  do  this  would  be  to  compare  the  actual  per- 
formance of  CAB-regulated  airlines  with  the  benchmark  of  the  actual 
performance  of  those  airlines  not  regulated  by  the  CAB. 

The  nonregulated  airlines  are  primarily  the  intrastate  airlines,  but 
not  entirely.  This  study  covers  the  post-World  War  II  period  with 
emphasis  on  the  years  since  1949. 

CONTROL   OF   INDUSTRY   ENTRY   IS    NECESSARY   FOR   REGULATION 

One  conclusion  of  this  study  is  that  a  necessary  condition  for  effec- 
tive regulation  is  the  control  of  entry.  It  is  necessary  to  control  entry 
to  prevent  rival  airlines  from  entering  should  regulation  cause  fares 
to  rise  above  average  costs,  and  it  is  necessary  to  prevent  entry  in  case 
costs  themselves  rise  above  the  minimum  average  achievable. 

The  CAB  has  effectively  closed  entry  into  U.S.  interstate  airline 
operations.  There  have  been  16  to  10  trunk  carriers,  decreasing  in  num- 
bers from  1938  to  the  present  time,  with  Pan  Am  being  another  large 
carrier,  but  primarily  international. 

There  have  been  21  to  8  local  service  carriers  from  1946  to  1950 
to  the  present  time  with  Air  New  England  being  the  latest  addition 
after  a  25-year  hiatus  in  the  authorization  of  such  carriers. 


453 

In  1973,  tlie  total  operating  revenues  of  all  U.S.  airlines  operating 
large  aircraft  were  approximately  $13  billion.  Of  this  $13  billion,  the 
10  trunks  plus  Pan  American  counted  for  81.2  percent,  and  each  of 
these  trunk  carriers  served  between  37  and  111  cities  with  60  to  390 
aircraft  each.  Local  service  carrier  share  was  8.2  percent  of  the  $13 
billion,  and  they  served  50  to  9,5  cities  per  carrier  with  33  to  133  air- 
craft. So  these  two  CAB-regulated  airline  groups  together  have 
accounted  for  92.4  percent  of  the  $13  billion  or  a  total  of  roughly  $12 
billion  of  this  $13  billion. 

All  other  airlines  in  the  United  States  accounted  for  the  remaining 
7.6  percent  or  roughly  $1  billion. 

DISECOXOMIES   OF   SCALE:    100    TO    2  00    AIRLINES    WITPIOUT  REGULATION 

The  conclusions  of  my  study  indicate  that  without  CAB  regula- 
tion there  would  be  between  100  to  200  or  more  airlines  in  the  United 
States  operating  large  aircraft  in  scheduled  service,  and  figure  No. 
1,  which  is  the  one  in  the  corner  there,  summarizes  this.  Twenty  CAB- 
regulated  trunk  and  local  service  carriers  plus  Pan  Am  as  opposed  to 
200  or  more  nonregulated  airlines  without  the  CAB. 

Senator  Kennedy.  How  can  you  make  a  statement  like  that  when 
we  have  just  heard  from  two  operators,  one  of  whom  felt  that  unless 
you  were  very  sure  that  you  would  be  able  to  build  up  G5-per'cent 
passenger  capacity,  that  you  may  very  well  go  out  of  business?  Here 
we  have  20  with  regulation.  You  talk  about  100  to  200.  How  do  you 
draw  that  conclusion?  Would  it  not  oversaturate  the  market  and 
cause  finnncial  turmoil  and  disaster  among  carriers? 

Dr.  Jordan.  We  shoidd  recognize  that  the  nonregulated  airlines 
have  all  been  smaller  lines. 

Senator  Kennedy.  Does  that  mean  you  go  on  a  small  line  from 
Boston  to  Washington? 

Dr.  Jordan.  Yes,  it  would  operate  from  3  to  4  to  6  planes  as  opposed 
to  40  to  60  to  400  ail-planes.  The  point  is  there  is  enough  traffic  to  sup- 
port small  airlines  with  three  or  four  aircraft  and  make  them  liable. 
They  will  be  able  to  achieve  all  the  possible  efficiencies  with  that  small 
operation,  and  such  small  airlines  have  been  viable  in  the  California 
and  Texas  situation  without  regulation. 

What  I  am  saying  is  that  without  regulation  which  causes  airlines 
to  be  large,  you  would  have  a  large  number  of  small  airlines,  each  one 
specializing  in  a  certain  kind  of  operation. 

Senator  Kennedy.  Wliy  does  regulation  require  that  the  airlines 
be  large? 

Dr.  Jordan.  Because,  given  entry  control,  the  trunks  have  been 
limited  to  those  certified  in  1938  and  the  local  service  carriers  limited 
to  those  certificated  between  1946  and  1950.  and  these  ar-e  the  only  air- 
lines that  have  been  allowed  to  provide  interstate  seivice.  As  the  city- 
Dairs  haA'e  expanded  and  total  traffic  has  expanded,  these  airlines  have 
been  required  to  expand.  Also,  when  an  airline  makes  a  major  mistake, 
it  is  forced  to  merge  like  the  Capital-United  merger  of  some  years 
back  so  with  no  entry  the  size  of  the  remaining  airlines  increases. 
Closed  entry  is  the  cause  of  large  airlines. 

Senator  Kennedy.  If  you  had  a  greater  number  of  airlines  sictually 
required  to  go  into  a  merger  situation,  as  you  pointed  out,  why  does 


454 

that  not  run  contrary  to  your  thesis  that  you  would  have  100  to  200, 
if  the  experience  has'^been  in  recent  times  that  the  total  numbers  have 
actually  reduced?  Why  do  you  not  believe  if  you  start  out  with  100, 
that  it  will  finally  contract  down  to  the  20  or  so  even  without  the 
regulation  ? 

Dr.  Jordan.  Because  without  regulation  we  find  that  airlines  can  be 
efficient,  low-cost  carriers  with  small  numbers  of  aircraft,  and  there- 
fore, as  airlines  become  larger  they  become  less  efficient,  and  we  will 
lose  business  to  the  small  airlines  that  will  enter. 

I  should  mention  that  one  very  striking  comparison — we  have  had 
merger  acquisitions  in  CAB  regulation.  There  has  not  been  a  single 
merger  application  in  a  nonregulated  environment. 

Senator  Kennedy.  Is  it  more  efficient  to  have  a  smaller  number  of 
planes  and  more  airlines,  or  a  larger  number  of  planes  and  fewer  air- 
lines? It  seems  to  me,  for  example,  in  the  terms  of  trucks  supplying 
the  planes  with  gasoline  or  handling  baggage  that  you  would  have 
regulated  lines.  Let  us  take,  for  example,  the  case  of  the  trucks  supply- 
ing planes  with  gasoline  or  handling  baggage  transfer.  On  the  one 
hand,  you  would  have  the  larger  regulated  airlines  using  one  gasoline 
truck  to  refuel  planes  all  day,  while,  on  the  other,  you  would  have  the 
smaller  airlines  using  one  gasoline  truck  to  refuel  four  or  five  planes. 

Dr.  Jordan.  In  response  to  that  question,  the  gasoline  truck  is 
usually  owned  by  the  fuel  company.  It  supplies  airlines  and  it  does 
not  have  to  supply  one  airline. 

Senator  Kennedy.  Is  that  true  of  all  these  other  services? 

Dr.  Jordan.  Yes ;  in  terms  of  overall  cost 

REGULATED   FARES    ARE    4  0-7  0    PERCENT   HIGHER    THAN    UNREGULATED 

Senator  Kennedy.  Let's  continue  with  your  other  testimony. 

Dr.  Jordan.  Fine. 

Given  closed  entry,  we  find  what  are  some  results  of  CAB  regula- 
tion. One  clear  result  has  been  higher  fares.  I  have  shown  in  figure  2, 
a  comparison  of  fares  Avith  regulation  as  opposed  to  fares  without 
regulation.  Those  in  red  are  with  regulation.  I  have  broken  them  down 
into  short-haul,  which  I  have  defined  as  0  to  250  miles,  more  or  less; 
medium-haul  from  251  to  1,000  miles;  and  long-haul  over  1,000  miles. 
I  have  shown  the  Boston-New  York,  Boston-Washington,  and  Boston- 
Los  Angeles  fares  as  examples  for  these  mileage  categories. 

In  the  case  of  a  short-haul,  the  California  analysis  implies  that  the 
fares  with  regulation  are  between  40-70  percent  higher  than  without 
regulation,  and  this  is  the  basis  for  the  difference  between  $25.93,  which 
is  the  actual  regulated  fare  between  Boston  and  New  York,  and  the 
$15  fare  without  regulation. 

In  terms  of  medium-haul,  we  find  that  the  fare  differences  are 
around  75  to  100  percent,  w^hich  is  a  difference  of  $41.67  with  regula- 
tion, versus  $21  without  regulation  for  the  Boston-Washington  fare. 

Finally,  for  the  long-haul,  we  find  fares  roughly  100  percent  larger 
with  regulation,  whicTi  gives  you  the  $187.04,  the  actual  fare  today, 
as  opposed  to  without  regulation,  approximately  $95. 

Now,  these  large  differences  are  in  city  fares  that  have  relatively 
high  traffic  density,  being  defined  as  over  100,000  passengers  per  year. 
The  same  analysis  applies  for  small  city-pairs  with  the  fare  differences 


455 

not  as  lai'^e,  but  witli  the  noiu'e^ulated  fares  still  lower  than  regu- 
lated fares.  This  analysis  is  based  upon  California,  but  supported  by 
similar  analyses  in  the  Texas  case,  in  the  military  airlift  case  where 
we  had  re^ilation  by  the  CAB,  imposed  in  1960,  and  it  is  supported 
by  a  comparison  with  reg:ulated  fares  in  Canada,  between  Montreal 
and  Toronto.  We  find  with  regulation  in  Canada,  their  fares  are  high, 
roughly  the  same  as  regulated  fares  in  the  United  States. 

So,  without  regulation  fares  are  lower.  With  regulation,  fares  are 
higher. 

Senator  Kennedy.  Why  ? 

REGULATION   INCREASES    COSTS SERVICE    COMPETITION 

Dr.  Jordan.  Well,  that  is  the  next  question.  If  prices  are  so  high 
why  are  there  not  large  profits,  for  example. 

Well,  it  appears  that  regulation  also  serves  to  increase  costs  of  opera- 
tion. Fares  go  up,  costs  also  go  up. 

This  is  a  major  area  of  work.  I  have  identified  three  important 
sources  of  these  difPerences  in  cost.  One  source  is  decreased  aircraft 
utilization.  The  second  source  is  lack  of  specialization  among  the  regu- 
lated airlines.  The  third  source  is  the  purchase  of  more  and  more  in- 
puts at  higher  prices,  that  is  labor  and  aircraft,  for  example. 

First,  the  matter  about  aircraft  utilization.  CAB  regulation  for  the 
last  86  years  has  been  asymmetric,  it  has  been  complete  in  entry  and 
exit,  it  has  been  very  effective  in  price,  but  it  has  been  ineffective  and 
almost  nonexistent  in  the  matter  of  service  quality.  Furthermore,  the 
CAB  has  failed  to  allocate  specific  market  shares  to  each  airline.  In- 
stead, it  has  certified  two  or  more  airlines  in  many  city-pairs  where- 
upon it  has  said  all  right,  fellows,  your  prices  are  fixed  but  you  are  in 
this  city-pair,  go  ahead  and  get  what  you  can  get.  The  airlines'  re- 
sponse has  been  well,  we  are  controlled  pricewase  but  not  service 
qualitywise,  let's  have  superior  service  quality.  The  way  to  do  that  is 
to  operate  brandnew  airplanes  at  high-schedule  frequencies.  They 
have  done  this.  Furthermore,  they  put  fewer  seats  in  their  aircraft, 
and  even  given  fewer  seats,  they  have  operated  enough  frequencies 
to  give  theui  lower  numbers  of  passengers  per  flight,  low-load  factors. 

Now,  I  have  on  figure  No.  3,  which  I  will  refer  to  very  shortly, 
an  explanation  of  what  this  means  in  terms  of  cost.  Looking  only  at 
aircraft  costs,  just  the  aircraft  from  the  viewpoint  of  the  airline  costs, 
if  we  increased  the  load  factor  from  the  current  56-percent  level, 
Avhicli  is  what  it  was  last  year,  1974.  to  70  percent,  a  25-percent  in- 
crease, and  by  the  way,  the  70  percent  load  factor  is  the  lowest  load 
factor  that  existed  between  1955  and  1964  in  California.  Quite  feasibly, 
it  has  occurred  regularly  without  regulation.  If  we  have  this  kind  of 
load  factor  in  all  U.S.  operations  we  would  decrease  the  fleet  size  by 
20  percent,  25  percent  increase  in  load  factor,  20  percent  decrease  iii 
passenger  flights. 

^  Such  a  decrease  in  the  fleet  would  reduce  the  value  of  the  aircraft 
fleet  from  the  present  $12.25  billion,  undepreciated  value,  for  the 
trunk  airlines,  to  about  $9.8  billion. 

A  second  factor  would  be  if  we  increased  the  average  life  of  each 
aircraft  by  25  percent,  going  from  sav  14  years,  which  is  an  average 
allowance  for  present  CAB  airlines,'  to  i7i/>  years,  you  would  de- 


456 

crease  the  average  annual  replacement  costs  from  $875  million  to 
$560  million  per  year,  or  a  saving  of  $315  million  per  year,  roughly 
$1.90  per  passenger  enplanement.  Now,  that  is  just  one  cost  factor 
which  results  in  an  appreciable  decrease  in  costs. 

Wlien  you  combine  this  with  a  decrease  in  operating  costs  associ- 
ated with  a  decrease  in  the  number  of  flights  by  20  percent,  you  can 
see  very  quickly  you  get  into  very  large  differences  in  cost. 

A  second  source  of  the  reason  that  the  intrastate  carriers  are  low- 
cost  is  their  ability  to  obtain  a  higher  output  per  employee.  Now,  they 
are  all  small,  the  intrastate  airlines.  They  have  usually  one  kind  of 
aircraft.  Each  provides  a  very  specialized  service  and  they  find  that 
the  result  of  this  has  been  employee  specialization  which  has  resulted 
in  large  outputs  per  employee. 

If  you  look  at  figure  No.  4  behind  you.  Senator,  these  are  fig- 
ures for  1965,  which  is  not  the  most  favorable  year  for  comparison, 
because  PSA  had  better  years,  but  it  is  a  good  average  year,  the  output 
per  employee  of  the  average  trunk  carriers  measured  on  available 
seat-miles  per  employee  was  603,000  available  seat-miles  per  employee. 
Compared  to  PSA's  1,270,000  available  seat-miles. 

Looking  at  the  next  two  columns,  revenue-passenger  miles,  the  aver- 
age trunk  carrier  had  333,000  revenue-passenger  miles,  PSA  had 
804,000.  It  is  a  difference  of  141  percent.  Senator. 

It  it  only  fair  to  point  out  these  figures  are  biased  against  the  trunk 
carriers.  They  do  not  include  cargo  production.  Yet  the  total  number 
of  employees  does  include  cargo. 

The  third  series  of  figures  attempts  to  correct  this  bias.  They  pro- 
vide figures  biased  against  PSA.  These  are  revenue  figures.  In  1965, 
the  average  yield  per  revenue-passenger  mile  for  PSA  was  3.85  cents, 
while  trunk  yield  was  5.93  cents,  roughly  50  percent  higher.  So  it  took 
PSA  half  again  as  many  passengers  to  get  the  same  revenues. 

PSA  had  revenues  per  employee  of  $32,500  versus  $22,200  for  the 
average  trunk.  Even  with  the  figures  biased  against  PSA,  it  is  still 
superior. 

Taking  these  three  comparisons  and  making  adjustments,  approxi- 
mating how  it  works  out  overall,  I  would  estimate  that  PSA  is  roughly 
100  percent  more  productive  per  employee  than  the  average  trunk  air- 
line. That  is  an  appreciable  difference.  This  is  an  important  cause  of 
the  lower  costs  of  the  intrastate  carriers. 

The  final  point  is  the  matter  of  increased  input  prices.  CAB  has 
closed  entry.  Therefore,  if  any  of  the  airlines  buy  their  inputs  from 
organizations  which  have  monopoly  power,  then  some  of  their  monop- 
oly gains,  some  of  the  airlines'  monopoly  gains  can  be  captured  by  their 
input  suppliers.  We  find  evidence  of  this  in  terms  of  the  labor  share 
per  total  cost. 

Here  we  find  in  figure  No.  5  that  for  1973  the  average  trunk  carrier 
had  44.3  percent  of  its  total  costs  accounted  for  by  labor  costs,  while 
three  intrastate  carriers  in  1974,  that  is,  for  10  or  11  months  in  1974, 
had  an  average  total  cost  of  26.1  to  34.0  percent — much  lower  than 
the  trunk  or  local  service  carriers.  This  is  evidence  that  there  are  higher 
costs,  higher  prices  paid  to  inputs  by  the  regulated  airlines. 

In  terms  of  your  aircraft,  the  other  major  input  into  airline  opera- 
tions which  the  airlines  must  purchase,  you  have  a  situation  where  the 
manufacturers  are  encouraged  to  produce,  to  modify  their  aircraft  and 


457 

give  variations.  A  number  of  modifications  are  bought  by  tlie  airlines 
so  that  manufacturers  make  a  large  number  of  different' kinds  of  air- 
craft, thereby  increasing  production  costs  and  aircraft  prices.  The 
demand  is  great  by  the  airlines  because  they  must  have  the  most  mod- 
ern aircraft  to  provide  high-quality  service. ' 

Those  are  three  major  sources  of  differences  in  airline  costs  with 
regulation  as  opposed  to  without  regulation. 

TOTAL   COST  OF  REGULATIOX 

Senator  Kennedy.  Have  you  figured  out  how  much  that  would  save  ? 

Dr.  Jordan.  A  rough  estimate.  Senator  for  the  trunk  carriers  in 
1973,  total  operating  costs  were  about  $10.6  billion.  It  is  my  best  esti- 
mate that  without  the  regulation  it  would  be  reduced  down'to  approx- 
imately $7  billion,  a  saving  roughly  of  $3.5  billion,  an  appreciable 
difference. 

Senator  Kennedy.  Do  you  figure,  that  based  upon  these  variables, 
$31/^  billion  could  be  saved  by  consumers  with  deregulation? 

Dr.  Jordan.  Yes,  that  is  correct. 

EFFECT   OF   COMPETITION    ON    SAFETY 

Senator  Kennedy.  What  about  safety  ?  How  can  we  be  sure  that  if 
we  get  these  100  to  200  airlines  without  regulation  that  we  are  not 
going  to  have  people's  lives  endangered  ? 

Dr.  Jordan.  Well,  we  turn  again  to  the  evidence.  First  of  all,  all 
airlines,  whether  interstate  or  trastate,  are  controlled  by  the  Federal 
Aviation  Agency,  regardless  of  CAB  regulation.  So  they  have  that 
same  requirement  for  safety  as  controlled  by  the  FAA. 

Second,  within  California  there  have  been  two  fatal  accidents, 
one  a  DC-3  in  1949,  with  a  loss  of  nine  lives,  including  the  wife  and 
son  the  owner  of  the  airline,  which  was  a  painful  experience  for  him. 
In  1964  there  was  a  second  crash,  an  airline  operating  out  of  Lake 
Tahoe,  which  is  a  very  high  altitude  and  a  small  airport,  with  a  loss 
of  85  lives.  In  both  cases  the  airlines  went  out  of  business,  the  second 
case  because  the  FAA  rescinded  the  operating  license,  but  nevertheless 
they  went  out  of  business  which  gave  the  intrastate  carriers  the  sus- 
picion that  perhaps  if  they  are  unsafe  they  would  not  be  around  very 
long.  So  tliere  is  motivation  to  be  safe  in  that  very  real  sense. 

In  terms  of  deaths  per  revenue-passenger  miles,  those  two  accidents, 
given  the  low-traffic  base  for  the  period  from  1949  to  1965,  give  a 
relatively  high  average  of  number  of  deaths  per  100,000  of  revenue 
passenger  miles.  But  if  you  extend  those  same  number  of  fatalities  into 
the  present  time,  roughly  8  more  years,  it  goes  down  to  approximately 
that  of  the  trunk  carriers.  So  the  evidence  is  not  clear,  based  on  those 
two  crashes  for  the  shorter  time  period,  less  safety,  more  fatalities  per 
100,000  revenue-passenger  miles.  If  you  extend  the  period  you  find 
comparable  safety.  Again  the  key  point  is  if  you  are  unsafe,  if  you 
are  small,  you  are  going  out  of  business,  because  there  are  very  good 
substitutes  available  to  take  over  your  business. 

Senator  Kennedy.  That  is  a  pretty  tough  test  for  100  or  200  car- 
riers. I  would  think  that  people  would  want  to  know  with  100  or  200 
carriers,  which  ones  ave  safe.  They  are  on  the  market  today  and  if  they 
have  a  fatality  they  are  out,  but  couldn't  they  come  back  under  some 


458 

other  name  ?  How  wil]  we  be  able  to  give  the  kind  of  assurances 
that  would  prevent  this  ? 

Dr.  Jordan.  I  would  say  it  is  important  for  the  FAA,  who  must 
check  the  management  of  every  airline  and  its  operating  procedures, 
to  be  very  careful  about  that.  If  the  airline  has  a  crash  and  the  airline 
goes  out  of  business  because  they  are  negligent,  tlie  FAA  should  be 
responsible  to  make  sure  those  same  j)eople  did  not  go  back  into  busi- 
ness, would  suspect. 

Also,  once  you  do  have  a  crash  in  your  operation  it  is  harder  to  re- 
enter without  regulation. 

UXFAIR   COMPETITIOK    (PREDATORY   PRICING) 

Senator  Kennedy.  What  about  predatory  pricing  ?  Would  that  not 
bring  about  a  good  deal  of  chaos  for  the  consumer  ? 

Dr.  Jordan.  Well,  Senator,  I  have  just  finislied  a  study  of  predatory 
pricing  and  practices.  The  theoretical  background  provided  by  Pro- 
fessor McGee  years  ago  said  predatory  pricing  is  rare  because  it  is 
costly.  You  can  do  it  easier  by  merging,  buying  them  out. 

I  had  three  cases  where  it  was  alleged,  predatory  cases.  I  tested 
those  and  found  in  two  cases  there  was  great  doubt  as  to  any  predatory 
practices.  In  one  case  there  may  have  been,  but  again  not  sure.  This 
is  consistent  with  the  position  that  predatory  practices  are  rare.  I, 
therefore,  suspect  that  with  a  large  number  of  airlines  you  will  have 
relatively  little  predatory  practices.  If  you  can  get  new"  entry,  why  be  a 
predator  ?  The  guy  goes  out  of  business  if  you  take  him  over ;  other- 
wise, his  assets  remain  and  can  be  used  for  reentry.  Predation  is  very, 
very  costly  and  rare. 

PACIFIC    SOUTHWEST    AIRLINES— INCREASINGLY    RP^GULATED 

Senator  Kennedy.  Have  you  had  any  practical  experience  in  the 
airline  industry  ? 

Dr.  Jordan.  Yes.  I  started  working  with  the  airlines  in  December 
of  1947.  My  experience  spans  most  of  the  post-war  period.  As  you 
mentioned,  I  worked  four  airlines,  most  recently  from  1960  to  1964 
for  Western  Air  Lines  in  Los  Angeles,  and  I  worked  as  an  airport 
consultant  from  the  airport  viewpoint,  and  of  course,  I  have  my  mili- 
tary service  with  the  Military  Airlift  Command. 

Senator  Kennedy.  After  all  of  this  has  been  said  and  done,  could 
we  not  explain  it  that  perhaps  PSA  is  under  California  regulations 
and  this  is  just  sort  of  a  specialized  situation  in  California? 

Dr.  Jordan.  Well,  California  regulation  is  interesting.  Senator. 
They  are  starting  to  change.  Before  1965,  there  was  little  regulation. 
Open  entry,  no  regulation  of  price  decreases.  Anybody  could  come  in 
and  offer  their  initial  fares  with  no  questions  asked. 

Following  1965,  the  California  Public  ITtilities  Commission  was 
given  jurisdiction,  and  they  have  perhaj^s  since  1969  closed  entry. 
It  takes  awhile  for  these  adjustments  to  take  j)lace.  Things  do  not 
happen  overnight.  PSA  is  starting  to  act  like  a  regulated  airline.  We 
find  between  1969  and  January  1975,  this  last  fare  increase,  that  their 
]5ercentage  fare  increase  is  very  similar  to  the  percentage  increases  of 
the  airlines  regulated  by  the  CAB. 


459 

You  notice  on  that  figure  Xo.  5,  PSA  of  the  three  intrastate  carriers 
has  tlie  highest  labor  share  of  total  costs.  It  is  getting  out  towards  the 
level  of  total  trunk  carriers. 

My  hypothesis  is  that  10  years  from  now  when  I  do  a  restudy  of 
the  California  situation  that  if  the  present  PUC  situation  has  Ijeen 
maintained  we  will  be  finding  PSA  and  the  others  more  like  the  CAB 
airlines. 

Senator  Kennedy.  Why  is  that  ? 

Dr.  Jordan.  Because  California  regulation  has  become  very  similar 
to  CAB  regulation,  different  in  procedure  or  different  in  its  detail, 
but  the  economic  results  from  fragmentary  evidence  since  1969  indi- 
cate that  the  cases  are  becoming  very,  very  similar.  Closed  entry  in 
California  is  very  important. 

Senator  Kennedy.  Mr.  Summerfield. 

Mr.  Summerfield.  Thank  you.  Senator. 

My  testimony  does  not  differ  in  fact  very  much  from  Dr.  Jordon's. 
It  is"  a  fact  that  costs  are  different.  I  present  a  different  interpretation 
of  why  these  costs  are  different.  It  is  based  on  a  study  of  the  actual 
operating  environments  of  the  infra-California  carriers  versus  the 
trunk  and  local  service  carriers. 

COSTS  saved  by  PSA  BECAUSE  IT  DOES  NOT  FLY  INTERSTATE    (INTERLINING, 
TICKETING,    ACCOUNTING) 

To  summarize  briefly  what  is  contained  in  a  little  more  detail  in 
my  written  testimony,  a  number  of  differences  exist  because  of  the 
fact  that  PSA  and  Air  California  are  intrastate  carriers  operating  in 
restricted  geographical  areas.  In  the  first  place,  because  they  don't 
do  any  interline  work,  as  Mi\  Clifford  pointed  out,  the  reservations 
clerks  don't  need  to  know  anything  about  how  to  get  from  Santa  Ana 
to  Boston  because  they  are  not  allowed  to  route  you  that  way.  This 
means  you  don't  have  to  train  them,  a  major  saving  in  training  costs. 
But  the  big  saving  is  in  the  time  they  spend  on  the  telephone  when  you 
call  for  a  reservation.  They  simply' make  point-to-point  reservations. 
According  to  my  estimates,  the  average  length  of  call  for  reservations 
is  at  least  three"  times  as  long  for  a  trunk  carrier  as  for  an  intrastate 
carrier.  This  represents  about  a  3  to  1  difference  in  the  manpower 
required  to  man  the  reservation  system. 

A  second  way  in  which  this  carries  over  is  in  the  ticketing.  PSA 
uses  a  very  simple  cash  register  receipt  as  a  ticket.  They  don't  have 
to  figure  out  what  the  fare  is  between  Boston  and  iNIodesto,  Calif.,  a 
market  for  which  there  may  be  no  quoted  fare.  A  carrier  that  writes 
interline  tickets  must  add  up  fares  through  several  routes  to  be  sure 
they  have  the  lowest  fare.  Again,  there  are  substantial  economies 
because  intrastate  carriers  cannot  do  this. 

Senator  Kennedy.  If  the  agents  did  have  interline  training  the  same 
as  other  carriers,  couldn't  that  mean  that  they  would  gain  more  rev- 
enues because  they  would  get  additional  kinds  of  services? 

Mr.  Summerfi?:ld.  That  is  possible,  that  they  would  gain 
additional 

Senator  Kennedy.  Isn't  it  likely?  Don't  you  suppose  they  would 
certainly  get  some? 


460 

As  I  understand,  if  you  want  to  go  from  Boston  to  San  Francisco 
to  Los  Angeles,  and  you  want  to  fly  that  San  Francisco  to  Los  An- 
geles leg  on  PSA,  which  is  cheaper,  you  can't  get  a  ticket  on  it. 

Mr,  SuMMERFiELD.  You  can  if  you  wait  till  you  get  to  San  Francisco 
to  buy  the  ticket. 

Senator  Kennedy.  That  is  the  point.  If  people  wanted  to  fly,  and 
knew  PSA  was  cheaper,  wouldn't  they  take  PSA  ?  And  would  not  that 
help  to  offset  additional  training  costs  for  reservation  clerks? 

Mr.  SuMMERFiELD.  It  might.  It  would  expand  the  whole  system. 
Senator,  so  they  would  end  up  having  more  airplanes  and  more  flights. 
Whether  the  cost  would  go  up  proportionately  or  not,  I  do  not  know. 

Senator  Kennedy.  Maybe  load  capacity  would  change  from  65 
percent  full  up  to  75  percent. 

Mr.  SuMMERFiELD.  I  dou't  kuow,  Senator.  That  is  speculation.  What 
I  have  tried  to  do  is  limit  myself  to  the  areas  in  which  there  are  data 
to  support  the  analyses. 

Revenue  accounting  is  a  third  way  in  which  this  lack  of  interlining 
saA'es  the  intrastate  carrier  a  good  deal  of  money. 

Senator  Kennedy.  What  is  the  cost  for  interlining,  have  you  figured 
that  out? 

Mr.  SuMMERFiELD.  ]\Iv  estimate  for  those  three  functions  for  PSA, 
for  reservations  for  ticketing  and  for  revenue  accounting,  is  on  the 
order  of  $11  million  a  year  difference  for  the  size  of  operation  that 
PSA  now  has.  This  is  based  on  data  on  the  cost  per  passenger  of  these 
services  and  some  estimates  based  on  my  experience. 

Senator  Kennedy.  How  much  does  that  work  out  to  per  passenger  ? 

Mr.  SuMMERFiEiJ).  A  little  under  $2  a  passenger.  PSA  said  they 
carry  about  a  little  less  than  61/0  million  passengers  a  year. 

Senator  Kennedy.  So  it  is  about  $1.50. 

Mr.  SUMMERFIELD.  $1.50,  $1.70. 

Senator  Kennedy.  Even  with  a  $1.60  additional  charge,  it  is  difficult 
to  explain,  the  sizable  difference  in  the  fare  between  PSA  and  the  CAB- 
regulated  airlines. 

INIr.  SuMMERFiELD.  That  is  right,  but  there  are  other  factors,  some 
of  which  have  been  mentioned,  but  let  me  try  to  put  some  on  dollar 
amounts  on  some  of  these  other  factors,  also. 

COST  SAVED  BY  PSA  BECAUSE  IT  DOES  NOT  SERVE  FOOD 

They  don't  have  fo